FORM 10-Q
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
(Mark One)
☒ | QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the quarterly period ended June 30, 20192020
OR
☐ | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the transition period from to
Commission File Number 001-36109
QTS Realty Trust, Inc.
QualityTech, LP
(Exact name of registrant as specified in its charter)
| |
Maryland (QTS Realty Trust, Inc.) | 46-2809094 |
Delaware (QualityTech, LP) (State or other jurisdiction of incorporation or organization) | 27-0707288 (I.R.S. Employer Identification No.) |
| |
12851 Foster Street, Overland Park, Kansas | 66213 |
(Address of principal executive offices) | (Zip Code) |
(Registrant’s telephone number, including area code) (913) 312-5503
Not Applicable
(Former name, former address and former fiscal year, if changed since last report)
Securities registered pursuant to Section 12(b) of the Act:
Title of each class: |
| Trading Symbol |
| Name of each exchange on which registered: |
Class A common stock, $0.01 par value | | QTS | | New York Stock Exchange |
Preferred Stock, 7.125% Series A Cumulative Redeemable Perpetual, $0.01 par value | | QTS PR A | | New York Stock Exchange |
Preferred Stock, 6.50% Series B Cumulative Convertible Perpetual, $0.01 par value | | QTS PR B | | New York Stock Exchange |
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
| |
QTS Realty Trust, Inc. Yes ☒ No ◻ | QualityTech, LP Yes |
(1) QualityTech, LP is not required to file reports pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934, but has filed all such reports during the preceding 12 months. |
Indicate by check mark whether the registrant has submitted electronically every interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).
| |
QTS Realty Trust, Inc. Yes ☒ No ◻ | QualityTech, LP Yes ☒ No ◻ |
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.
QTS Realty Trust, Inc.
| | | |
Large accelerated filer | ☒ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☐ | Smaller reporting company | ☐ |
| | | |
| | Emerging growth company | ☐ |
QualityTech, LP
| | | |
Large accelerated filer | ☐ | Accelerated filer | ☐ |
| | | |
Non-accelerated filer | ☒ | Smaller reporting company | ☐ |
| | | |
| | Emerging growth company | ☐ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ◻
Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).
| |
QTS Realty Trust, Inc. Yes ☐ No ☒ | QualityTech, LP Yes ☐ No ☒ |
There were 55,301,98161,302,594 shares of Class A common stock, $0.01 par value per share, and 128,408 shares of Class B common stock, $0.01 par value per share, of QTS Realty Trust, Inc. outstanding on July 31, 2019.30, 2020.
EXPLANATORY NOTE
This report combines the quarterly reports on Form 10-Q of QTS Realty Trust, Inc. (“QTS”), a Maryland corporation and QualityTech, LP, a Delaware limited partnership, which is our operating partnership (the “Operating Partnership”). This report also includes the financial statements of QTS and those of the Operating Partnership, although it presents only one set of combined notes for QTS’ financial statements and those of the Operating Partnership.
Substantially all of QTS’sQTS’ assets are held by, and its operations are conducted through, the Operating Partnership. QTS is the sole general partner of the Operating Partnership, and, as of June 30, 2019,2020, its only material asset consisted of its ownership of approximately 89.3%90.2% of the Operating Partnership. Management operates QTS and the Operating Partnership as one business. The management of QTS consists of the same employees as the management of the Operating Partnership. QTS does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. QTS has not issued or guaranteed any indebtedness. Except for net proceeds from public equity issuances by QTS, which are contributed to the Operating Partnership in exchange for units of limited partnership interest of the Operating Partnership, the Operating Partnership generates all remaining capital required by our business through its operations, the direct or indirect incurrence of indebtedness, and the issuance of partnership units. Therefore, as general partner with voting control of the Operating Partnership, QTS consolidates the Operating Partnership for financial reporting purposes.
We believe, therefore, that a combined presentation with respect to QTS and the Operating Partnership, including providing one set of notes for the financial statements of QTS and the Operating Partnership, provides the following benefits:
● | enhances investors’ understanding of QTS and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business; |
● | eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure in this report applies to both QTS and the Operating Partnership; and |
● | creates time and cost efficiencies through the preparation of one presentation instead of two separate presentations. |
In addition, in light of these combined disclosures, we believe it is important for investors to understand the few differences between QTS and the Operating Partnership in the context of how QTS and the Operating Partnership operate as a consolidated company. With respect to balance sheets, the presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated balance sheets of QTS and those of the Operating Partnership. On the Operating Partnership’s consolidated balance sheets, partners’ capital includes preferred partnership units and common partnership units as well as accumulated other comprehensive income (loss) that are owned by or attributable to QTS and other partners. On QTS’ consolidated balance sheets, stockholders’ equity includes preferred stock, common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated dividends in excess of earnings. The remaining equity reflected on QTS’ consolidated balance sheet is the portion of net assets that are retained by partners other than QTS, referred to as noncontrolling interests. With respect to statements of operations, the primary difference in QTS’ Statements of Operations and Statements of Comprehensive Income (Loss) is that for net income (loss), QTS retains its proportionate share of the net income (loss) based on its ownership of the Operating Partnership, with the remaining balance being retained by the Operating Partnership.
In order to highlight the few differences between QTS and the Operating Partnership, there are sections and disclosure in this report that discuss QTS and the Operating Partnership separately, including separate financial statements, separate audit reports, separate controls and procedures sections, separate Exhibit 31 and 32 certifications, and separate presentation of certain accompanying notes to the financial statements, including Note 119 – Partners’ Capital, Equity and Incentive Compensation Plans. In the sections that combine disclosure for QTS and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of “we,” “our,” “us,” “our company” and “the Company.” Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, we believe that these general references to “we,” “our,” “us,” “our company” and “the Company” in this context are appropriate because the business is one enterprise operated through the Operating Partnership.
2
QTS Realty Trust, Inc.
QualityTech, LP
Form 10-Q
For the Quarterly Period Ended June 30, 20192020
INDEX
| | |
| | Page |
PART I. | | |
| | |
ITEM 1. | 4 | |
| | |
|
| |
| | |
| Notes to QTS Realty Trust, Inc. and QualityTech, LP Financial Statements | 18 |
| | |
ITEM 2. | Management's Discussion and Analysis of Financial Condition and Results of Operations |
|
| | |
ITEM 3. |
| |
| | |
ITEM 4. |
| |
| | |
PART II. | | |
| | |
ITEM 1. |
| |
| | |
ITEM 1A. |
| |
| | |
ITEM 2. |
| |
| | |
ITEM 3. |
| |
| | |
ITEM 4. |
| |
| | |
ITEM 5. |
| |
| | |
ITEM 6. |
| |
| | |
|
|
3
PART I. FINANCIAL INFORMATION
ITEM 1. Financial Statements
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands except share and per share data)
| | | | | | | | | | | | |
|
| June 30, 2019 |
| December 31, 2018 |
| June 30, 2020 |
| December 31, 2019 | ||||
| | (unaudited) | | | | | (unaudited) | | | | ||
ASSETS | | | | | | | | | | | | |
Real Estate Assets | | | | | | | | | | | | |
Land | | $ | 107,307 | | $ | 105,541 | | $ | 149,023 | | $ | 130,605 |
Buildings, improvements and equipment | | | 2,087,374 | | | 1,917,251 | | | 2,487,379 | | | 2,178,901 |
Less: Accumulated depreciation | | | (523,040) | | | (467,644) | | | (623,915) | | | (558,560) |
| | | 1,671,641 | | | 1,555,148 | | | 2,012,487 | | | 1,750,946 |
Construction in progress | | | 856,005 | | | 790,064 | | | 976,257 | | | 920,922 |
Real Estate Assets, net | | | 2,527,646 | | | 2,345,212 | | | 2,988,744 | | | 2,671,868 |
Investments in unconsolidated entity | | | 32,797 | | | — | | | 27,768 | | | 30,218 |
Operating lease right-of-use assets, net | | | 59,946 | | | — | | | 54,274 | | | 57,141 |
Cash and cash equivalents | | | 10,638 | | | 11,759 | | | 16,474 | | | 15,653 |
Rents and other receivables, net | | | 60,754 | | | 55,093 | | | 76,638 | | | 81,181 |
Acquired intangibles, net | | | 89,226 | | | 95,451 | | | 74,700 | | | 81,679 |
Deferred costs, net | | | 46,662 | | | 45,096 | | | 54,775 | | | 52,363 |
Prepaid expenses | | | 8,224 | | | 6,822 | | | 11,846 | | | 10,586 |
Goodwill | | | 173,843 | | | 173,843 | | | 173,843 | | | 173,843 |
Assets held for sale | | | — | | | 71,800 | ||||||
Other assets, net | | | 57,217 | | | 56,893 | | | 48,809 | | | 49,001 |
TOTAL ASSETS | | $ | 3,066,953 | | $ | 2,861,969 | | $ | 3,527,871 | | $ | 3,223,533 |
| | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | |
Unsecured credit facility, net | | $ | 949,816 | | $ | 945,657 | | $ | 1,201,962 | | $ | 1,010,640 |
Senior notes, net of debt issuance costs | | | 395,167 | | | 394,786 | | | 395,930 | | | 395,549 |
Finance leases and mortgage notes payable | | | 48,211 | | | 4,674 | | | 45,572 | | | 46,876 |
Operating lease liabilities | | | 67,457 | | | — | | | 61,252 | | | 64,416 |
Accounts payable and accrued liabilities | | | 90,211 | | | 99,166 | | | 169,420 | | | 142,547 |
Dividends and distributions payable | | | 33,247 | | | 29,633 | | | 37,461 | | | 34,500 |
Advance rents, derivative contracts, security deposits and other liabilities | | | 47,987 | | | 32,679 | ||||||
Liabilities held for sale | | | — | | | 24,349 | ||||||
Advance rents, security deposits and other liabilities | | | 20,070 | | | 18,027 | ||||||
Derivative liabilities | | | 65,297 | | | 26,609 | ||||||
Deferred income taxes | | | 1,294 | | | 1,097 | | | 510 | | | 749 |
Deferred income | | | 40,033 | | | 33,241 | | | 43,461 | | | 39,169 |
TOTAL LIABILITIES | | | 1,673,423 | | | 1,565,282 | | | 2,040,935 | | | 1,779,082 |
| | | | | | | | | | | | |
EQUITY | | | | | | | | | | | | |
7.125% Series A cumulative redeemable perpetual preferred stock: $0.01 par value (liquidation preference $25.00 per share), 4,600,000 shares authorized, 4,280,000 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 103,212 | | | 103,212 | ||||||
6.50% Series B cumulative convertible perpetual preferred stock: $0.01 par value (liquidation preference $100.00 per share), 3,162,500 shares authorized, issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 304,223 | | | 304,265 | ||||||
Common stock: $0.01 par value, 450,133,000 shares authorized, 55,390,521 and 51,123,417 shares issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 554 | | | 511 | ||||||
7.125% Series A cumulative redeemable perpetual preferred stock: $0.01 par value (liquidation preference $25.00 per share), 4,600,000 shares authorized, 4,280,000 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 103,212 | | | 103,212 | ||||||
6.50% Series B cumulative convertible perpetual preferred stock: $0.01 par value (liquidation preference $100.00 per share), 3,162,500 shares authorized, issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 304,223 | | | 304,223 | ||||||
Common stock: $0.01 par value, 450,133,000 shares authorized, 61,431,881 and 58,227,523 shares issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 614 | | | 582 | ||||||
Additional paid-in capital | | | 1,219,048 | | | 1,062,473 | | | 1,463,445 | | | 1,330,444 |
Accumulated other comprehensive income (loss) | | | (23,310) | | | 2,073 | | | (61,322) | | | (24,642) |
Accumulated dividends in excess of earnings | | | (316,158) | | | (278,548) | | | (428,972) | | | (376,002) |
Total stockholders’ equity | | | 1,287,569 | | | 1,193,986 | | | 1,381,200 | | | 1,337,817 |
Noncontrolling interests | | | 105,961 | | | 102,701 | | | 105,736 | | | 106,634 |
TOTAL EQUITY | | | 1,393,530 | | | 1,296,687 | | | 1,486,936 | | | 1,444,451 |
TOTAL LIABILITIES AND EQUITY | | $ | 3,066,953 | | $ | 2,861,969 | | $ | 3,527,871 | | $ | 3,223,533 |
See accompanying notes to financial statements.
4
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands except share and per share data)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 114,977 | | $ | 101,086 | | $ | 224,366 | | $ | 201,014 | | $ | 125,996 | | $ | 114,977 | | $ | 246,077 | | $ | 224,366 |
Other | | | 4,190 | | | 11,191 | | | 7,490 | | | 24,960 | | | 5,644 | | | 4,190 | | | 11,855 | | | 7,490 |
Total revenues | | | 119,167 | | | 112,277 | | | 231,856 | | | 225,974 | | | 131,640 | | | 119,167 | | | 257,932 | | | 231,856 |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Property operating costs | | | 38,570 | | | 36,558 | | | 72,673 | | | 74,298 | | | 40,349 | | | 38,570 | | | 81,130 | | | 72,673 |
Real estate taxes and insurance | | | 3,355 | | | 2,903 | | | 6,722 | | | 5,808 | | | 4,106 | | | 3,355 | | | 8,017 | | | 6,722 |
Depreciation and amortization | | | 41,481 | | | 37,820 | | | 80,269 | | | 73,733 | | | 47,554 | | | 41,481 | | | 92,624 | | | 80,269 |
General and administrative | | | 20,124 | | | 21,031 | | | 40,015 | | | 43,265 | | | 21,391 | | | 20,124 | | | 42,074 | | | 40,015 |
Transaction and integration costs | | | 1,039 | | | 653 | | | 2,253 | | | 1,573 | | | 381 | | | 1,039 | | | 597 | | | 2,253 |
Restructuring | | | — | | | 11,430 | | | — | | | 19,960 | ||||||||||||
Total operating expenses | | | 104,569 | | | 110,395 | | | 201,932 | | | 218,637 | | | 113,781 | | | 104,569 | | | 224,442 | | | 201,932 |
Gain on sale of real estate, net | | | — | | | — | | | 13,408 | | | — | | | — | | | — | | | — | | | 13,408 |
Operating income | | | 14,598 | | | 1,882 | | | 43,332 | | | 7,337 | | | 17,859 | | | 14,598 | | | 33,490 | | | 43,332 |
Other income and expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 36 | | | 25 | | | 81 | | | 26 | | | 2 | | | 36 | | | 2 | | | 81 |
Interest expense | | | (6,459) | | | (8,203) | | | (13,605) | | | (16,313) | | | (6,924) | | | (6,459) | | | (14,086) | | | (13,605) |
Other income (expense) | | | (40) | | | — | | | (40) | | | — | | | — | | | (40) | | | 159 | | | (40) |
Equity in earnings (loss) of unconsolidated entity | | | (401) | | | — | | | (675) | | | — | ||||||||||||
Income (loss) before taxes | | | 7,734 | | | (6,296) | | | 29,093 | | | (8,950) | ||||||||||||
Equity in net loss of unconsolidated entity | | | (590) | | | (401) | | | (1,267) | | | (675) | ||||||||||||
Income before taxes | | | 10,347 | | | 7,734 | | | 18,298 | | | 29,093 | ||||||||||||
Tax benefit (expense) of taxable REIT subsidiaries | | | (199) | | | (137) | | | (410) | | | 2,265 | | | (138) | | | (199) | | | 31 | | | (410) |
Net income (loss) | | | 7,535 | | | (6,433) | | | 28,683 | | | (6,685) | ||||||||||||
Net (income) loss attributable to noncontrolling interests | | | (52) | | | 1,002 | | | (1,642) | | | 1,031 | ||||||||||||
Net income (loss) attributable to QTS Realty Trust, Inc. | | $ | 7,483 | | $ | (5,431) | | $ | 27,041 | | $ | (5,654) | ||||||||||||
Net income | | | 10,209 | | | 7,535 | | | 18,329 | | | 28,683 | ||||||||||||
Net income attributable to noncontrolling interests | | | (317) | | | (52) | | | (427) | | | (1,642) | ||||||||||||
Net income attributable to QTS Realty Trust, Inc. | | $ | 9,892 | | $ | 7,483 | | $ | 17,902 | | $ | 27,041 | ||||||||||||
Preferred stock dividends | | | (7,045) | | | (2,248) | | | (14,090) | | | (2,576) | | | (7,045) | | | (7,045) | | | (14,090) | | | (14,090) |
Net income (loss) attributable to common stockholders | | $ | 438 | | $ | (7,679) | | $ | 12,951 | | $ | (8,230) | ||||||||||||
Net income attributable to common stockholders | | $ | 2,847 | | $ | 438 | | $ | 3,812 | | $ | 12,951 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) per share attributable to common shares: | | | | | | | | | | | | | | | | | | | | | | | | |
Basic | | $ | (0.03) | | $ | (0.16) | | $ | 0.17 | | $ | (0.17) | | $ | (0.05) | | $ | (0.03) | | $ | (0.06) | | $ | 0.17 |
Diluted | | | (0.03) | | | (0.16) | | | 0.17 | | | (0.17) | | | (0.05) | | | (0.03) | | | (0.06) | | | 0.17 |
See accompanying notes to financial statements.
5
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment gain | | | 66 | | | — | | | 66 | | | — |
Increase (decrease) in fair value of derivative contracts | | | (18,606) | | | 2,563 | | | (28,459) | | | 8,545 |
Reclassification of other comprehensive income to interest expense (income) | | | (471) | | | 91 | | | (965) | | | 493 |
Comprehensive income (loss) | | | (11,476) | | | (3,779) | | | (675) | | | 2,353 |
Comprehensive (income) loss attributable to noncontrolling interests | | | 1,291 | | | 431 | | | 74 | | | (271) |
Comprehensive income (loss) attributable to QTS Realty Trust, Inc. | | $ | (10,185) | | $ | (3,348) | | $ | (601) | | $ | 2,082 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment gain (loss) | | | 64 | | | 66 | | | (159) | | | 66 |
Decrease in fair value of derivative contracts | | | (3,641) | | | (18,606) | | | (40,356) | | | (28,459) |
Reclassification of other comprehensive income to utilities expense | | | 410 | | | — | | | 764 | | | — |
Reclassification of other comprehensive income to interest expense | | | 2,703 | | | (471) | | | 3,461 | | | (965) |
Comprehensive income (loss) | | | 9,745 | | | (11,476) | | | (17,961) | | | (675) |
Comprehensive (income) loss attributable to noncontrolling interests | | | (1,022) | | | 1,291 | | | 1,809 | | | 74 |
Comprehensive income (loss) attributable to QTS Realty Trust, Inc. | | $ | 8,723 | | $ | (10,185) | | $ | (16,152) | | $ | (601) |
See accompanying notes to financial statements.
6
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF EQUITY
(unaudited and in thousands)
The consolidated statement of equity for the three and six months ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | | |||
| | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | | |||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income (loss) |
| excess of earnings |
| equity |
| interests |
| Total | ||||||||
Balance April 1, 2019 | | 7,443 | | $ | 407,435 | | 55,354 | | $ | 554 | | $ | 1,214,711 | | $ | (6,702) | | $ | (292,219) | | $ | 1,323,779 | | $ | 110,701 | | $ | 1,434,480 |
Net share activity through equity award plan | | — | | | — | | 37 | | | — | | | 505 | | | — | | | — | | | 505 | | | (326) | | | 179 |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | | — | | | (16,608) | | | — | | | (16,608) | | | (1,998) | | | (18,606) |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 3,832 | | | — | | | — | | | 3,832 | | | 464 | | | 4,296 |
Dividends declared on the Series A Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | | (1,906) |
Dividends declared on the Series B Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | | (5,139) |
Dividends declared to common stockholders | | — | | | — | | — | | | — | | | — | | | — | | | (24,377) | | | (24,377) | | | — | | | (24,377) |
Dividends declared to noncontrolling interests | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,932) | | | (2,932) |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 7,483 | | | 7,483 | | | 52 | | | 7,535 |
Balance June 30, 2019 | | 7,443 | | $ | 407,435 | | 55,391 | | $ | 554 | | $ | 1,219,048 | | $ | (23,310) | | $ | (316,158) | | $ | 1,287,569 | | $ | 105,961 | | $ | 1,393,530 |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | | |||
| | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | | |||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income (loss) |
| excess of earnings |
| equity |
| interests |
| Total | ||||||||
Balance January 1, 2020 | | 7,443 | | $ | 407,435 | | 58,228 | | $ | 582 | | $ | 1,330,444 | | $ | (24,642) | | $ | (376,002) | | $ | 1,337,817 | | $ | 106,634 | | $ | 1,444,451 |
Net share activity through equity award plan | | — | | | — | | 240 | | | 3 | | | (1,312) | | | — | | | — | | | (1,309) | | | (149) | | | (1,458) |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | | — | | | (33,155) | | | — | | | (33,155) | | | (3,560) | | | (36,715) |
Foreign currency translation adjustments | | — | | | — | | — | | | — | | | — | | | (201) | | | — | | | (201) | | | (22) | | | (223) |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 4,377 | | | — | | | — | | | 4,377 | | | 498 | | | 4,875 |
Proceeds net of fees from settlement of forward shares | | — | | | — | | 1,930 | | | 19 | | | 78,516 | | | — | | | — | | | 78,535 | | | 4,682 | | | 83,217 |
Dividends declared on Series A Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | | (5,139) |
Dividends declared to common stockholders | | — | | | — | | — | | | — | | | — | | | — | | | (28,393) | | | (28,393) | | | — | | | (28,393) |
Dividends declared to noncontrolling interests | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (3,133) | | | (3,133) |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 8,010 | | | 8,010 | | | 110 | | | 8,120 |
Balance March 31, 2020 | | 7,443 | | $ | 407,435 | | 60,398 | | $ | 604 | | $ | 1,412,025 | | $ | (57,998) | | $ | (403,430) | | $ | 1,358,636 | | $ | 105,060 | | $ | 1,463,696 |
Net share activity through equity award plan | | — | | | — | | 1 | | | — | | | (1,225) | | | — | | | — | | | (1,225) | | | (135) | | | (1,360) |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | | — | | | (3,382) | | | — | | | (3,382) | | | (259) | | | (3,641) |
Foreign currency translation adjustments | | — | | | — | | — | | | — | | | — | | | 58 | | | — | | | 58 | | | 6 | | | 64 |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 5,477 | | | — | | | — | | | 5,477 | | | 604 | | | 6,081 |
Proceeds net of fees from settlement of forward shares | | — | | | — | | 1,033 | | | 10 | | | 47,168 | | | — | | | — | | | 47,178 | | | 3,277 | | | 50,455 |
Dividends declared on Series A Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | | (5,139) |
Dividends declared to common stockholders | | — | | | — | | — | | | — | | | — | | | — | | | (28,389) | | | (28,389) | | | — | | | (28,389) |
Dividends declared to noncontrolling interests | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (3,134) | | | (3,134) |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 9,892 | | | 9,892 | | | 317 | | | 10,209 |
Balance June 30, 2020 | | 7,443 | | $ | 407,435 | | 61,432 | | $ | 614 | | $ | 1,463,445 | | $ | (61,322) | | $ | (428,972) | | $ | 1,381,200 | | $ | 105,736 | | $ | 1,486,936 |
7
The consolidated statement of equity for the three and six months ended March 31,June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | | |||
| | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | | |||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income (loss) |
| excess of earnings |
| equity |
| interests |
| Total | ||||||||
Balance January 1, 2019 | | 7,443 | | $ | 407,477 | | 51,123 | | $ | 511 | | $ | 1,062,473 | | $ | 2,073 | | $ | (278,548) | | $ | 1,193,986 | | $ | 102,701 | | $ | 1,296,687 |
Net cumulative effect upon ASC 842 adoption (see Note 2) | | — | | | — | | — | | | — | | | — | | | — | | | (1,813) | | | (1,813) | | | — | | | (1,813) |
Net share activity through equity award plan | | — | | | — | | 231 | | | 3 | | | 660 | | | — | | | — | | | 663 | | | 78 | | | 741 |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | | — | | | (8,775) | | | — | | | (8,775) | | | (1,078) | | | (9,853) |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 2,928 | | | — | | | — | | | 2,928 | | | 372 | | | 3,300 |
Adjustment to expenses net from Series B Preferred stock offering | | — | | | (42) | | — | | | — | | | — | | | — | | | — | | | (42) | | | — | | | (42) |
Proceeds net of fees from common equity offering | | — | | | — | | 4,000 | | | 40 | | | 148,650 | | | — | | | — | | | 148,690 | | | 9,973 | | | 158,663 |
Dividends declared on the Series A Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | | (1,906) |
Dividends declared on the Series B Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | | (5,139) |
Dividends declared to common stockholders | | — | | | — | | — | | | — | | | — | | | — | | | (24,371) | | | (24,371) | | | — | | | (24,371) |
Dividends declared to noncontrolling interests | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,935) | | | (2,935) |
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 19,558 | | | 19,558 | | | 1,590 | | | 21,148 |
Balance March 31, 2019 | | 7,443 | | $ | 407,435 | | 55,354 | | $ | 554 | | $ | 1,214,711 | | $ | (6,702) | | $ | (292,219) | | $ | 1,323,779 | | $ | 110,701 | | $ | 1,434,480 |
7
The consolidated statement of equity for the three months ended June 30, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | ||||
| | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | ||||||||||
| | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | ||||||||||||||||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income |
| excess of earnings |
| equity |
| interests |
| Total |
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income (loss) |
| excess of earnings |
| equity |
| interests |
| Total | ||||||||||||||||
Balance April 1, 2018 | | 4,280 | | $ | 103,184 | | 51,136 | | $ | 511 | | $ | 1,052,202 | | $ | 6,573 | | $ | (195,074) | | $ | 967,396 | | $ | 112,799 | | $ | 1,080,195 | ||||||||||||||||||||||||||||
Balance January 1, 2019 | | 7,443 | | $ | 407,477 | | 51,123 | | $ | 511 | | $ | 1,062,473 | | $ | 2,073 | | $ | (278,548) | | $ | 1,193,986 | | $ | 102,701 | | $ | 1,296,687 | ||||||||||||||||||||||||||||
Net cumulative effect upon ASC Topic 842 adoption | | — | | — | | — | | | — | | | — | | | — | | | (1,813) | | | (1,813) | | | — | | (1,813) | ||||||||||||||||||||||||||||||
Net share activity through equity award plan | | — | | — | | 5 | | | — | | | (586) | | | — | | | — | | | (586) | | | (38) | | (624) | | — | | — | | 231 | | | 3 | | | 660 | | | — | | | — | | | 663 | | | 78 | | 741 | ||||
Increase in fair value of derivative contracts | | — | | — | | — | | | — | | | — | | | 2,267 | | | — | | | 2,267 | | | 296 | | 2,563 | ||||||||||||||||||||||||||||||
Decrease in fair value of derivative contracts | | — | | — | | — | | | — | | | — | | | (8,775) | | | — | | | (8,775) | | | (1,078) | | (9,853) | ||||||||||||||||||||||||||||||
Equity-based compensation expense | | — | | — | | — | | | — | | | 5,051 | | | — | | | — | | | 5,051 | | | 659 | | 5,710 | | — | | — | | — | | | — | | | 2,928 | | | — | | | — | | | 2,928 | | | 372 | | 3,300 | ||||
Adjustment to expenses net from Series A Preferred stock offering | | — | | 28 | | — | | | — | | | — | | | — | | | — | | | 28 | | | — | | 28 | ||||||||||||||||||||||||||||||
Proceeds net of fees from Series B Preferred Stock offering | | 3,163 | | 304,426 | | — | | | — | | | — | | | — | | | — | | | 304,426 | | | — | | 304,426 | ||||||||||||||||||||||||||||||
Adjustment to expenses net from Series B Convertible Preferred stock offering | | — | | (42) | | — | | | — | | | — | | | — | | | — | | | (42) | | | — | | (42) | ||||||||||||||||||||||||||||||
Proceeds net of fees from common equity offering | | — | | — | | 4,000 | | | 40 | | | 148,650 | | | — | | | — | | | 148,690 | | | 9,973 | | 158,663 | ||||||||||||||||||||||||||||||
Dividends declared on Series A Preferred Stock | | — | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | (1,906) | ||||||||||||||||||||||||||||||
Dividends declared on Series B Convertible Preferred Stock | | — | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | (5,139) | ||||||||||||||||||||||||||||||
Dividends declared to common stockholders | | — | | — | | — | | | — | | | — | | | — | | | (24,371) | | | (24,371) | | | — | | (24,371) | ||||||||||||||||||||||||||||||
Dividends declared to noncontrolling interests | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,935) | | (2,935) | ||||||||||||||||||||||||||||||
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 19,558 | | | 19,558 | | | 1,590 | | | 21,148 | ||||||||||||||||||||||||||||
Balance March 31, 2019 | | 7,443 | | $ | 407,435 | | 55,354 | | $ | 554 | | $ | 1,214,711 | | $ | (6,702) | | $ | (292,219) | | $ | 1,323,779 | | $ | 110,701 | | $ | 1,434,480 | ||||||||||||||||||||||||||||
Net share activity through equity award plan | | — | | — | | 37 | | | — | | | 505 | | | — | | | — | | | 505 | | | (326) | | 179 | ||||||||||||||||||||||||||||||
Decrease in fair value of derivative contracts | | — | | — | | — | | | — | | | — | | | (16,608) | | | — | | | (16,608) | | | (1,998) | | (18,606) | ||||||||||||||||||||||||||||||
Equity-based compensation expense | | — | | — | | — | | | — | | | 3,832 | | | — | | | — | | | 3,832 | | | 464 | | 4,296 | ||||||||||||||||||||||||||||||
Dividends declared on Series A Preferred Stock | | — | | — | | — | | | — | | | — | | | — | | | (1,905) | | | (1,905) | | | — | | (1,905) | | — | | — | | — | | | — | | | — | | | — | | | (1,906) | | | (1,906) | | | — | | (1,906) | ||||
Dividends declared on Series B Convertible Preferred Stock | | — | | — | | — | | | — | | | — | | | — | | | (343) | | | (343) | | | — | | (343) | | — | | — | | — | | | — | | | — | | | — | | | (5,139) | | | (5,139) | | | — | | (5,139) | ||||
Dividends declared to common stockholders | | — | | — | | — | | | — | | | — | | | — | | | (20,971) | | | (20,971) | | | — | | (20,971) | | — | | — | | — | | | — | | | — | | | — | | | (24,377) | | | (24,377) | | | — | | (24,377) | ||||
Distributions to noncontrolling interests | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,736) | | (2,736) | | — | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,932) | | (2,932) | ||||
Net income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (5,431) | | | (5,431) | | | (1,002) | | | (6,433) | ||||||||||||||||||||||||||||
Balance June 30, 2018 | | 7,443 | | $ | 407,638 | | 51,141 | | $ | 511 | | $ | 1,056,667 | | $ | 8,840 | | $ | (223,724) | | $ | 1,249,932 | | $ | 109,978 | | $ | 1,359,910 | ||||||||||||||||||||||||||||
Net income | | — | | | — | | — | | | — | | | — | | | — | | | 7,483 | | | 7,483 | | | 52 | | | 7,535 | ||||||||||||||||||||||||||||
Balance June 30, 2019 | | 7,443 | | $ | 407,435 | | 55,391 | | $ | 554 | | $ | 1,219,048 | | $ | (23,310) | | $ | (316,158) | | $ | 1,287,569 | | $ | 105,961 | | $ | 1,393,530 |
The consolidated statementSee accompanying notes to financial statements.
8
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited and in thousands)
For the threesix months ended March 31, 2018:
June 30, 2020 and 2019
| | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | | | | | | | | | Accumulated other | | Accumulated | | Total | | | | | | | |||
| | Preferred Stock | | Common stock | | Additional | | comprehensive | | dividends in | | stockholders' | | Noncontrolling | | | | |||||||||||
|
| Shares |
| Amount |
| Shares |
| Amount |
| paid-in capital |
| income |
| excess of earnings |
| equity |
| interests |
| Total | ||||||||
Balance January 1, 2018 | | — | | $ | — | | 50,702 | | $ | 507 | | $ | 1,049,176 | | $ | 1,283 | | $ | (173,552) | | $ | 877,414 | | $ | 113,242 | | $ | 990,656 |
Net share activity through equity award plan | | — | | | — | | 434 | | | 4 | | | (1,311) | | | — | | | — | | | (1,307) | | | 1,069 | | | (238) |
Increase in fair value of derivative contracts | | — | | | — | | — | | | — | | | — | | | 5,290 | | | — | | | 5,290 | | | 692 | | | 5,982 |
Equity-based compensation expense | | — | | | — | | — | | | — | | | 4,337 | | | — | | | — | | | 4,337 | | | 561 | | | 4,898 |
Proceeds net of fees from Series A Preferred Stock offering | | 4,280 | | | 103,184 | | — | | | — | | | — | | | — | | | — | | | 103,184 | | | — | | | 103,184 |
Dividends declared on Series A Preferred Stock | | — | | | — | | — | | | — | | | — | | | — | | | (328) | | | (328) | | | — | | | (328) |
Dividends declared to stockholders | | — | | | — | | — | | | — | | | — | | | — | | | (20,971) | | | (20,971) | | | — | | | (20,971) |
Distributions to noncontrolling interests | | — | | | — | | — | | | — | | | — | | | — | | | — | | | — | | | (2,736) | | | (2,736) |
Net income (loss) | | — | | | — | | — | | | — | | | — | | | — | | | (223) | | | (223) | | | (29) | | | (252) |
Balance March 31, 2018 | | 4,280 | | $ | 103,184 | | 51,136 | | $ | 511 | | $ | 1,052,202 | | $ | 6,573 | | $ | (195,074) | | $ | 967,396 | | $ | 112,799 | | $ | 1,080,195 |
See accompanying notes to financial statements.
8
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited and in thousands)
For the six months ended June 30, 2019 and 2018
| | | | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Cash flow from operating activities: | | | | | | | | | | | | |
Net income (loss) | | $ | 28,683 | | $ | (6,685) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | ||||||
Net income | | $ | 18,329 | | $ | 28,683 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | ||||||
Depreciation and amortization | | | 77,019 | | | 70,804 | | | 89,183 | | | 77,019 |
Amortization of above and below market leases | | | 121 | | | 270 | | | 180 | | | 121 |
Amortization of deferred loan costs | | | 1,957 | | | 1,923 | | | 1,978 | | | 1,957 |
Equity in (earnings) loss of unconsolidated entity | | | 675 | | | — | ||||||
Distributions from unconsolidated entity | | | 600 | | | — | ||||||
Equity in net loss of unconsolidated entity | | | 1,267 | | | 675 | ||||||
Equity-based compensation expense | | | 7,596 | | | 7,480 | | | 10,956 | | | 7,596 |
Bad debt expense (recoveries) | | | 250 | | | (1,230) | ||||||
(Gain) loss on sale of assets, net | | | (13,408) | | | 2,846 | ||||||
Bad debt expense | | | 5,072 | | | 250 | ||||||
Gain on sale of real estate, net | | | — | | | (13,408) | ||||||
Deferred tax expense (benefit) | | | 197 | | | (2,443) | | | (238) | | | 197 |
Restructuring costs, net of cash paid | | | — | | | 10,065 | ||||||
Foreign currency remeasurement (gain) loss | | | 40 | | | — | ||||||
Foreign currency remeasurement (income) loss | | | (159) | | | 40 | ||||||
Changes in operating assets and liabilities | | | | | | | | | | | | |
Rents and other receivables, net | | | (1,998) | | | (1,914) | | | (536) | | | (1,998) |
Prepaid expenses | | | 35 | | | (3,925) | | | (1,259) | | | 35 |
Due from affiliates, net | | | 7,314 | | | — | ||||||
Due to/from affiliates, net | | | (1,085) | | | 7,314 | ||||||
Other assets | | | (425) | | | 1,867 | | | (127) | | | (425) |
Accounts payable and accrued liabilities | | | (11,815) | | | 3,535 | | | 2,548 | | | (11,815) |
Advance rents, security deposits and other liabilities | | | (3,601) | | | 1,369 | | | 2,374 | | | (3,601) |
Deferred income | | | 6,791 | | | 7,564 | | | 4,283 | | | 6,791 |
Net cash provided by operating activities | | | 99,431 | | | 91,526 | | | 133,366 | | | 99,431 |
| | | | | | | | | | | | |
Cash flow from investing activities: | | | | | | | | | | | | |
Proceeds from sale of property, net | | | 52,722 | | | 1,496 | | | — | | | 52,722 |
Acquisitions, net of cash acquired | | | (44,150) | | | (24,626) | | | (1,797) | | | (44,150) |
Additions to property and equipment | | | (205,487) | | | (248,852) | | | (377,655) | | | (205,487) |
Net cash used in investing activities | | | (196,915) | | | (271,982) | | | (379,452) | | | (196,915) |
| | | | | | | | | | | | |
Cash flow from financing activities: | | | | | | | | | | | | |
Credit facility proceeds | | | 213,311 | | | 231,000 | | | 298,405 | | | 213,311 |
Credit facility repayments | | | (210,000) | | | (362,000) | | | (108,000) | | | (210,000) |
Payment of deferred financing costs | | | (141) | | | (606) | | | (101) | | | (141) |
Payment of preferred stock dividends | | | (14,090) | | | (635) | | | (14,090) | | | (14,090) |
Payment of common stock dividends | | | (45,332) | | | (40,641) | | | (54,020) | | | (45,332) |
Distribution to noncontrolling interests | | | (5,669) | | | (5,289) | | | (6,068) | | | (5,669) |
Proceeds from exercise of stock options | | | 3,357 | | | 18 | | | 882 | | | 3,357 |
Payment of tax withholdings related to equity-based awards | | | (2,523) | | | (1,233) | | | (3,327) | | | (2,523) |
Principal payments on finance lease obligations | | | (1,560) | | | (4,316) | | | (1,275) | | | (1,560) |
Mortgage principal debt repayments | | | (26) | | | (32) | | | (29) | | | (26) |
Preferred stock issuance proceeds, net of costs | | | — | | | 408,415 | ||||||
Common stock issuance proceeds, net of costs | | | 159,026 | | | — | | | 134,077 | | | 159,026 |
Net cash provided by financing activities | | | 96,353 | | | 224,681 | | | 246,454 | | | 96,353 |
Effect of foreign currency exchange rates on cash and cash equivalents | | | 9 | | | — | | | 453 | | | 9 |
Net increase (decrease) in cash and cash equivalents | | | (1,122) | | | 44,225 | ||||||
Net change in cash and cash equivalents | | | 821 | | | (1,122) | ||||||
Cash and cash equivalents, beginning of period | | | 11,759 | | | 8,243 | | | 15,653 | | | 11,759 |
Cash and cash equivalents, end of period | | $ | 10,638 | | $ | 52,468 | | $ | 16,474 | | $ | 10,638 |
See accompanying notes to financial statements.
9
QTS REALTY TRUST, INC.
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(unaudited and in thousands)
For the six months ended June 30, 20192020 and 20182019
| | | | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION |
| | | | | |
| | | | | |
Cash paid for interest (excluding deferred financing costs and amounts capitalized) |
| $ | 27,828 | | $ | 25,647 |
| $ | 28,059 | | $ | 27,828 |
Noncash investing and financing activities: |
| | | | | |
| | | | | |
Accrued capital additions |
| $ | 43,780 | | $ | 67,708 |
| $ | 118,627 | | $ | 43,780 |
Net increase (decrease) in other assets/liabilities related to change in fair value of derivative contracts |
| $ | (28,459) | | $ | 8,545 | ||||||
Net decrease in other assets/liabilities related to change in fair value of derivative contracts |
| $ | (38,688) | | $ | (28,459) | ||||||
Equity received in unconsolidated entity in exchange for real estate assets |
| $ | 25,280 | | $ | — |
| $ | — | | $ | 25,280 |
Increase in assets in exchange for finance lease obligation |
| $ | 45,024 | | $ | — |
| $ | — | | $ | 45,024 |
Accrued equity issuance costs |
| $ | 385 | | $ | 777 |
| $ | 405 | | $ | 385 |
Accrued preferred stock dividend |
| $ | 5,938 | | $ | 2,576 |
| $ | 5,938 | | $ | 5,938 |
Accrued deferred financing costs | | $ | — | | $ | 14 |
See accompanying notes to financial statements.
10
QUALITYTECH, LP
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousandsexcept share and per share data)
| | | | | | | | | | | | |
|
| June 30, 2019 |
| December 31, 2018 |
| June 30, 2020 |
| December 31, 2019 | ||||
| | (unaudited) | | | | (unaudited) | | | ||||
ASSETS | | | | | | | | | | | | |
Real Estate Assets | | | | | | | | | | | | |
Land | | $ | 107,307 | | $ | 105,541 | | $ | 149,023 | | $ | 130,605 |
Buildings, improvements and equipment | | | 2,087,374 | | | 1,917,251 | | | 2,487,379 | | | 2,178,901 |
Less: Accumulated depreciation | | | (523,040) | | | (467,644) | | | (623,915) | | | (558,560) |
| | | 1,671,641 | | | 1,555,148 | | | 2,012,487 | | | 1,750,946 |
Construction in progress | | | 856,005 | | | 790,064 | | | 976,257 | | | 920,922 |
Real Estate Assets, net | | | 2,527,646 | | | 2,345,212 | | | 2,988,744 | | | 2,671,868 |
Investments in unconsolidated entity | | | 32,797 | | | — | | | 27,768 | | | 30,218 |
Operating lease right-of-use assets, net | | | 59,946 | | | — | | | 54,274 | | | 57,141 |
Cash and cash equivalents | | | 10,638 | | | 11,759 | | | 16,474 | | | 15,653 |
Rents and other receivables, net | | | 60,754 | | | 55,093 | | | 76,638 | | | 81,181 |
Acquired intangibles, net | | | 89,226 | | | 95,451 | | | 74,700 | | | 81,679 |
Deferred costs, net | | | 46,662 | | | 45,096 | | | 54,775 | | | 52,363 |
Prepaid expenses | | | 8,224 | | | 6,822 | | | 11,846 | | | 10,586 |
Goodwill | | | 173,843 | | | 173,843 | | | 173,843 | | | 173,843 |
Assets held for sale | | | — | | | 71,800 | ||||||
Other assets, net | | | 57,217 | | | 56,893 | | | 48,809 | | | 49,001 |
TOTAL ASSETS | | $ | 3,066,953 | | $ | 2,861,969 | | $ | 3,527,871 | | $ | 3,223,533 |
| | | | | | | | | | | | |
LIABILITIES | | | | | | | | | | | | |
Unsecured credit facility, net | | $ | 949,816 | | $ | 945,657 | | $ | 1,201,962 | | $ | 1,010,640 |
Senior notes, net of debt issuance costs | | | 395,167 | | | 394,786 | | | 395,930 | | | 395,549 |
Finance leases and mortgage notes payable | | | 48,211 | | | 4,674 | | | 45,572 | | | 46,876 |
Operating lease liabilities | | | 67,457 | | | — | | | 61,252 | | | 64,416 |
Accounts payable and accrued liabilities | | | 90,211 | | | 99,166 | | | 169,420 | | | 142,547 |
Dividends and distributions payable | | | 33,247 | | | 29,633 | | | 37,461 | | | 34,500 |
Advance rents, derivative contracts, security deposits and other liabilities | | | 47,987 | | | 32,679 | ||||||
Liabilities held for sale | | | — | | | 24,349 | ||||||
Advance rents, security deposits and other liabilities | | | 20,070 | | | 18,027 | ||||||
Derivative liabilities | | | 65,297 | | | 26,609 | ||||||
Deferred income taxes | | | 1,294 | | | 1,097 | | | 510 | | | 749 |
Deferred income | | | 40,033 | | | 33,241 | | | 43,461 | | | 39,169 |
TOTAL LIABILITIES | | | 1,673,423 | | | 1,565,282 | | | 2,040,935 | | | 1,779,082 |
| | | | | | | | | | | | |
PARTNERS' CAPITAL | | | | | | | | | | | | |
7.125% Series A cumulative redeemable perpetual preferred units: $0.01 par value (liquidation preference $25.00 per unit), 4,600,000 units authorized, 4,280,000 units issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 103,212 | | | 103,212 | ||||||
6.50% Series B cumulative convertible perpetual preferred units: $0.01 par value (liquidation preference $100.00 per unit), 3,162,500 units authorized, issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 304,223 | | | 304,265 | ||||||
Common units: $0.01 par value, 450,133,000 units authorized, 62,059,120 and 57,799,035 units issued and outstanding as of June 30, 2019 and December 31, 2018, respectively | | | 1,012,210 | | | 886,866 | ||||||
Accumulated other comprehensive income | | | (26,115) | | | 2,344 | ||||||
7.125% Series A cumulative redeemable perpetual preferred units: $0.01 par value (liquidation preference $25.00 per unit), 4,600,000 units authorized, 4,280,000 units issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 103,212 | | | 103,212 | ||||||
6.50% Series B cumulative convertible perpetual preferred units: $0.01 par value (liquidation preference $100.00 per unit), 3,162,500 units authorized, issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 304,223 | | | 304,223 | ||||||
Common units: $0.01 par value, 450,133,000 units authorized, 68,102,472 and 64,901,157 units issued and outstanding as of June 30, 2020 and December 31, 2019, respectively | | | 1,147,481 | | | 1,064,481 | ||||||
Accumulated other comprehensive income (loss) | | | (67,980) | | | (27,465) | ||||||
TOTAL PARTNERS' CAPITAL | | | 1,393,530 | | | 1,296,687 | | | 1,486,936 | | | 1,444,451 |
TOTAL LIABILITIES AND PARTNERS' CAPITAL | | $ | 3,066,953 | | $ | 2,861,969 | | $ | 3,527,871 | | $ | 3,223,533 |
See accompanying notes to financial statements.
11
QUALITYTECH, LP
INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS
(unaudited and in thousands)
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Revenues: | | | | | | | | | | | | | | | | | ||||||||
Rental | | $ | 114,977 | | $ | 101,086 | | $ | 224,366 | | $ | 201,014 | | $ | 125,996 | | $ | 114,977 | | $ | 246,077 | | $ | 224,366 |
Other | | | 4,190 | | | 11,191 | | | 7,490 | | | 24,960 | | | 5,644 | | | 4,190 | | | 11,855 | | | 7,490 |
Total revenues | | | 119,167 | | | 112,277 | | | 231,856 | | | 225,974 | | | 131,640 | | | 119,167 | | | 257,932 | | | 231,856 |
Operating Expenses: | | | | | | | | | | | | | ||||||||||||
Operating expenses: | | | | | | | | | | | | | ||||||||||||
Property operating costs | | | 38,570 | | | 36,558 | | | 72,673 | | | 74,298 | | | 40,349 | | | 38,570 | | | 81,130 | | | 72,673 |
Real estate taxes and insurance | | | 3,355 | | | 2,903 | | | 6,722 | | | 5,808 | | | 4,106 | | | 3,355 | | | 8,017 | | | 6,722 |
Depreciation and amortization | | | 41,481 | | | 37,820 | | | 80,269 | | | 73,733 | | | 47,554 | | | 41,481 | | | 92,624 | | | 80,269 |
General and administrative | | | 20,124 | | | 21,031 | | | 40,015 | | | 43,265 | | | 21,391 | | | 20,124 | | | 42,074 | | | 40,015 |
Transaction and integration costs | | | 1,039 | | | 653 | | | 2,253 | | | 1,573 | | | 381 | | | 1,039 | | | 597 | | | 2,253 |
Restructuring | | | — | | | 11,430 | | | — | | | 19,960 | ||||||||||||
Total operating expenses | | | 104,569 | | | 110,395 | | | 201,932 | | | 218,637 | | | 113,781 | | | 104,569 | | | 224,442 | | | 201,932 |
Gain on sale of real estate, net | | | — | | | — | | | 13,408 | | | — | | | — | | | — | | | — | | | 13,408 |
Operating income | | | 14,598 | | | 1,882 | | | 43,332 | | | 7,337 | | | 17,859 | | | 14,598 | | | 33,490 | | | 43,332 |
Other income and expenses: | | | | | | | | | | | | | ||||||||||||
Other income and expense: | | | | | | | | | | | | | ||||||||||||
Interest income | | | 36 | | | 25 | | | 81 | | | 26 | | | 2 | | | 36 | | | 2 | | | 81 |
Interest expense | | | (6,459) | | | (8,203) | | | (13,605) | | | (16,313) | | | (6,924) | | | (6,459) | | | (14,086) | | | (13,605) |
Other income (expense) | | | (40) | | | — | | | (40) | | | — | | | — | | | (40) | | | 159 | | | (40) |
Equity in earnings (loss) of unconsolidated entity | | | (401) | | | — | | | (675) | | | — | ||||||||||||
Income (loss) before taxes | | | 7,734 | | | (6,296) | | | 29,093 | | | (8,950) | ||||||||||||
Equity in net loss of unconsolidated entity | | | (590) | | | (401) | | | (1,267) | | | (675) | ||||||||||||
Income before taxes | | | 10,347 | | | 7,734 | | | 18,298 | | | 29,093 | ||||||||||||
Tax benefit (expense) of taxable REIT subsidiaries | | | (199) | | | (137) | | | (410) | | | 2,265 | | | (138) | | | (199) | | | 31 | | | (410) |
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 | ||||||||||||
Preferred unit distributions | | | (7,045) | | | (2,248) | | | (14,090) | | | (2,576) | | | (7,045) | | | (7,045) | | | (14,090) | | | (14,090) |
Net income (loss) attributable to common unitholders | | $ | 490 | | $ | (8,681) | | $ | 14,593 | | $ | (9,261) | ||||||||||||
Net income attributable to common unitholders | | $ | 3,164 | | $ | 490 | | $ | 4,239 | | $ | 14,593 |
See accompanying notes to financial statements.
12
QUALITYTECH, LP
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(unaudited and in thousands)
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment gain | | | 66 | | | — | | | 66 | | | — |
Increase (decrease) in fair value of derivative contracts | | | (18,606) | | | 2,563 | | | (28,459) | | | 8,545 |
Reclassification of other comprehensive income to interest expense (income) | | | (471) | | | 91 | | | (965) | | | 493 |
Comprehensive income (loss) | | $ | (11,476) | | $ | (3,779) | | $ | (675) | | $ | 2,353 |
| | | | | | | | | | | | |
| | Three Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 |
Other comprehensive income (loss): | | | | | | | | | | | | |
Foreign currency translation adjustment gain (loss) | | | 64 | | | 66 | | | (159) | | | 66 |
Decrease in fair value of derivative contracts | | | (3,641) | | | (18,606) | | | (40,356) | | | (28,459) |
Reclassification of other comprehensive income to utilities expense | | | 410 | | | — | | | 764 | | | — |
Reclassification of other comprehensive income to interest expense | | | 2,703 | | | (471) | | | 3,461 | | | (965) |
Comprehensive income (loss) | | $ | 9,745 | | $ | (11,476) | | $ | (17,961) | | $ | (675) |
See accompanying notes to financial statements.
13
QUALITYTECH, LP
INTERIM CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL
(unaudited and in thousands)
The consolidated statement of partners’ capital for the three and six months ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | |
| | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | ||||||||||||
| | Preferred Units | | Common Units | | Common Units | | comprehensive income (loss) | | | | ||||||||||
|
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total | |||||
Balance April 1, 2019 | | 7,443 | | $ | 407,435 | | 62,028 | | $ | 1,034,554 | | 1 | | $ | — | | $ | (7,509) | | $ | 1,434,480 |
Net share activity through equity award plan | | — | | | — | | 31 | | | 179 | | — | | | — | | | — | | | 179 |
Decrease in fair value of interest derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (18,606) | | | (18,606) |
Equity-based compensation expense | | — | | | — | | — | | | 4,296 | | — | | | — | | | — | | | 4,296 |
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) |
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (24,377) | | — | | | — | | | — | | | (24,377) |
Partnership distributions | | — | | | — | | — | | | (2,932) | | — | | | — | | | — | | | (2,932) |
Net income | | — | | | — | | — | | | 7,535 | | — | | | — | | | — | | | 7,535 |
Balance June 30, 2019 | | 7,443 | | $ | 407,435 | | 62,059 | | $ | 1,012,210 | | 1 | | $ | — | | $ | (26,115) | | $ | 1,393,530 |
| | | | | | | | | | | | | | | | | | | | | |
| | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | ||||||||||||
| | Preferred Units | | Common Units | | Common Units | | comprehensive income (loss) | | | | ||||||||||
|
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total | |||||
Balance January 1, 2020 | | 7,443 | | $ | 407,435 | | 64,901 | | $ | 1,064,481 | | 1 | | $ | — | | $ | (27,465) | | $ | 1,444,451 |
Net share activity through equity award plan | | — | | | — | | 238 | | | (1,458) | | — | | | — | | | — | | | (1,458) |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (36,715) | | | (36,715) |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | | (223) | | | (223) |
Equity-based compensation expense | | — | | | — | | — | | | 4,875 | | — | | | — | | | — | | | 4,875 |
Proceeds net of fees from settlement of forward shares | | — | | | — | | 1,930 | | | 83,217 | | — | | | — | | | — | | | 83,217 |
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) |
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (28,393) | | — | | | — | | | — | | | (28,393) |
Partnership distributions | | — | | | — | | — | | | (3,133) | | — | | | — | | | — | | | (3,133) |
Net income | | — | | | — | | — | | | 8,120 | | — | | | — | | | — | | | 8,120 |
Balance March 31, 2020 | | 7,443 | | $ | 407,435 | | 67,069 | | $ | 1,120,664 | | 1 | | $ | — | | $ | (64,403) | | $ | 1,463,696 |
Net share activity through equity award plan | | — | | | — | | 1 | | | (1,360) | | — | | | — | | | — | | | (1,360) |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (3,641) | | | (3,641) |
Foreign currency translation adjustment | | — | | | — | | — | | | — | | — | | | — | | | 64 | | | 64 |
Equity-based compensation expense | | — | | | — | | — | | | 6,081 | | — | | | — | | | — | | | 6,081 |
Proceeds net of fees from settlement of forward shares | | — | | | — | | 1,032 | | | 50,455 | | — | | | — | | | — | | | 50,455 |
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) |
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (28,389) | | — | | | — | | | — | | | (28,389) |
Partnership distributions | | — | | | — | | — | | | (3,134) | | — | | | — | | | — | | | (3,134) |
Net income | | — | | | — | | — | | | 10,209 | | — | | | — | | | — | | | 10,209 |
Balance June 30, 2020 | | 7,443 | | $ | 407,435 | | 68,102 | | $ | 1,147,481 | | 1 | | $ | — | | $ | (67,980) | | $ | 1,486,936 |
14
The consolidated statement of partners’ capital for the three and six months ended March 31,June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | |
| | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | ||||||||||||
| | Preferred Units | | Common Units | | Common Units | | comprehensive income (loss) | | | | ||||||||||
|
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total | |||||
Balance January 1, 2019 | | 7,443 | | $ | 407,477 | | 57,799 | | $ | 886,866 | | 1 | | $ | — | | $ | 2,344 | | $ | 1,296,687 |
Net cumulative effect upon ASC 842 adoption (see Note 2) | | — | | | — | | — | | | (1,813) | | — | | | — | | | — | | | (1,813) |
Net share activity through equity award plan | | — | | | — | | 229 | | | 741 | | — | | | — | | | — | | | 741 |
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (9,853) | | | (9,853) |
Equity-based compensation expense | | — | | | — | | — | | | 3,300 | | — | | | — | | | — | | | 3,300 |
Adjustment to expenses net from Series B Preferred equity offering | | — | | | (42) | | — | | | — | | — | | | — | | | — | | | (42) |
Proceeds net of fees from equity offering | | — | | | — | | 4,000 | | | 158,663 | | — | | | — | | | — | | | 158,663 |
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) |
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) |
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (24,371) | | — | | | — | | | — | | | (24,371) |
Partnership distributions | | — | | | — | | — | | | (2,935) | | — | | | — | | | — | | | (2,935) |
Net income | | — | | | — | | — | | | 21,148 | | — | | | — | | | — | | | 21,148 |
Balance March 31, 2019 | | 7,443 | | $ | 407,435 | | 62,028 | | $ | 1,034,554 | | 1 | | $ | — | | $ | (7,509) | | $ | 1,434,480 |
14
The consolidated statement of partners’ capital for the three months ended June 30, 2018:
| | | | | | | | | | | | | | | | | | | | | |
| | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | ||||||||||||
| | Preferred Units | | Common Units | | Common Units | | comprehensive income | | | | ||||||||||
|
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total | |||||
Balance April 1, 2018 | | 4,280 | | $ | 103,184 | | 57,810 | | $ | 969,580 | | 1 | | $ | — | | $ | 7,431 | | $ | 1,080,195 |
Net share activity through equity award plan | | — | | | — | | 8 | | | (624) | | — | | | — | | | — | | | (624) |
Increase in fair value of interest derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | 2,563 | | | 2,563 |
Equity-based compensation expense | | — | | | — | | — | | | 5,710 | | — | | | — | | | — | | | 5,710 |
Adjustments to expenses net from QTS Realty Trust, Inc. Series A Preferred equity offering | | — | | | 28 | | — | | | — | | — | | | — | | | — | | | 28 |
Proceeds net of fees from QTS Realty Trust, Inc. Series B Preferred equity offering | | 3,163 | | | 304,426 | | — | | | — | | — | | | — | | | — | | | 304,426 |
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,905) | | — | | | — | | | — | | | (1,905) |
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (343) | | — | | | — | | | — | | | (343) |
Dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (20,971) | | — | | | — | | | — | | | (20,971) |
Partnership distributions | | — | | | — | | — | | | (2,736) | | — | | | — | | | — | | | (2,736) |
Net (loss) | | — | | | — | | — | | | (6,433) | | — | | | — | | | — | | | (6,433) |
Balance June 30, 2018 | | 7,443 | | $ | 407,638 | | 57,818 | | $ | 942,278 | | 1 | | $ | — | | $ | 9,994 | | $ | 1,359,910 |
The consolidated statement of partners’ capital for the three months ended March 31, 2018:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | | Limited Partners' Capital | | General Partner's Capital | | Accumulated other | | | | ||||||||||||||||||||||||
| | Preferred Units | | Common Units | | Common Units | | comprehensive income | | | | | Preferred Units | | Common Units | | Common Units | | comprehensive income (loss) | | | | ||||||||||||||||||||
|
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total |
| Units |
| Amount |
| Units |
| Amount |
| Units |
| Amount |
| Amount |
| Total | ||||||||||
Balance January 1, 2018 | | — | | $ | — | | 57,246 | | $ | 989,207 | | 1 | | $ | — | | $ | 1,449 | | $ | 990,656 | |||||||||||||||||||||
Balance January 1, 2019 | | 7,443 | | $ | 407,477 | | 57,799 | | $ | 886,866 | | 1 | | $ | — | | $ | 2,344 | | $ | 1,296,687 | |||||||||||||||||||||
Net cumulative effect upon adoption of ASC Topic 842 adoption | | — | | | — | | — | | | (1,813) | | — | | | — | | | — | | | (1,813) | |||||||||||||||||||||
Net share activity through equity award plan | | — | | | — | | 564 | | | (238) | | — | | | — | | | — | | | (238) | | — | | | — | | 229 | | | 741 | | — | | | — | | | — | | | 741 |
Increase in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | 5,982 | | | 5,982 | |||||||||||||||||||||
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (9,853) | | | (9,853) | |||||||||||||||||||||
Equity-based compensation expense | | — | | | — | | — | | | 4,898 | | — | | | — | | | — | | | 4,898 | | — | | | — | | — | | | 3,300 | | — | | | — | | | — | | | 3,300 |
Proceeds net of fees from QTS Realty Trust, Inc. Series A Preferred equity offering | | 4,280 | | | 103,184 | | — | | | — | | — | | | — | | | — | | | 103,184 | |||||||||||||||||||||
Adjustment to expenses net from Series B Convertible Preferred equity offering | | — | | | (42) | | — | | | — | | — | | | — | | | — | | | (42) | |||||||||||||||||||||
Proceeds net of fees from equity offering | | — | | | — | | 4,000 | | | 158,663 | | — | | | — | | | — | | | 158,663 | |||||||||||||||||||||
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (328) | | — | | | — | | | — | | | (328) | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) |
Dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (20,971) | | — | | | — | | | — | | | (20,971) | |||||||||||||||||||||
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) | |||||||||||||||||||||
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (24,371) | | — | | | — | | | — | | | (24,371) | |||||||||||||||||||||
Partnership distributions | | — | | | — | | — | | | (2,736) | | — | | | — | | | — | | | (2,736) | | — | | | — | | — | | | (2,935) | | — | | | — | | | — | | | (2,935) |
Net income (loss) | | — | | | — | | — | | | (252) | | — | | | — | | | — | | | (252) | |||||||||||||||||||||
Balance March 31, 2018 | | 4,280 | | $ | 103,184 | | 57,810 | | $ | 969,580 | | 1 | | $ | — | | $ | 7,431 | | $ | 1,080,195 | |||||||||||||||||||||
Net income | | — | | | — | | — | | | 21,148 | | — | | | — | | | — | | | 21,148 | |||||||||||||||||||||
Balance March 31, 2019 | | 7,443 | | $ | 407,435 | | 62,028 | | $ | 1,034,554 | | 1 | | $ | — | | $ | (7,509) | | $ | 1,434,480 | |||||||||||||||||||||
Net share activity through equity award plan | | — | | | — | | 31 | | | 179 | | — | | | — | | | — | | | 179 | |||||||||||||||||||||
Decrease in fair value of derivative contracts | | — | | | — | | — | | | — | | — | | | — | | | (18,606) | | | (18,606) | |||||||||||||||||||||
Equity-based compensation expense | | — | | | — | | — | | | 4,296 | | — | | | — | | | — | | | 4,296 | |||||||||||||||||||||
Dividends declared on Series A Preferred Units | | — | | | — | | — | | | (1,906) | | — | | | — | | | — | | | (1,906) | |||||||||||||||||||||
Dividends declared on Series B Convertible Preferred Units | | — | | | — | | — | | | (5,139) | | — | | | — | | | — | | | (5,139) | |||||||||||||||||||||
Common dividends declared to QTS Realty Trust, Inc. | | — | | | — | | — | | | (24,377) | | — | | | — | | | — | | | (24,377) | |||||||||||||||||||||
Partnership distributions | | — | | | — | | — | | | (2,932) | | — | | | — | | | — | | | (2,932) | |||||||||||||||||||||
Net income | | — | | | — | | — | | | 7,535 | | — | | | — | | | — | | | 7,535 | |||||||||||||||||||||
Balance June 30, 2019 | | 7,443 | | $ | 407,435 | | 62,059 | | $ | 1,012,210 | | 1 | | $ | — | | $ | (26,115) | | $ | 1,393,530 |
See accompanying notes to financial statements.
15
QUALITYTECH, LP
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW
(unaudited and in thousands)
For the six months ended June 30, 20192020 and 20182019
| | | | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Cash flow from operating activities: | | | | | | | | �� | ||||
Net income (loss) | | $ | 28,683 | | $ | (6,685) | ||||||
Adjustments to reconcile net income (loss) to net cash provided by operating activities: | | | | | | | ||||||
Net income | | $ | 18,329 | | $ | 28,683 | ||||||
Adjustments to reconcile net income to net cash provided by operating activities: | | | | | | | ||||||
Depreciation and amortization | | | 77,019 | | | 70,804 | | | 89,183 | | | 77,019 |
Amortization of above and below market leases | | | 121 | | | 270 | | | 180 | | | 121 |
Amortization of deferred loan costs | | | 1,957 | | | 1,923 | | | 1,978 | | | 1,957 |
Equity in (earnings) loss of unconsolidated entity | | | 675 | | | — | ||||||
Distributions from unconsolidated entity | | | 600 | | | — | ||||||
Equity in net loss of unconsolidated entity | | | 1,267 | | | 675 | ||||||
Equity-based compensation expense | | | 7,596 | | | 7,480 | | | 10,956 | | | 7,596 |
Bad debt expense (recoveries) | | | 250 | | | (1,230) | ||||||
(Gain) loss on sale of assets, net | | | (13,408) | | | 2,846 | ||||||
Bad debt expense | | | 5,072 | | | 250 | ||||||
Gain on sale of real estate, net | | | — | | | (13,408) | ||||||
Deferred tax expense (benefit) | | | 197 | | | (2,443) | | | (238) | | | 197 |
Restructuring costs, net of cash paid | | | — | | | 10,065 | ||||||
Foreign currency remeasurement (gain) loss | | | 40 | | | — | ||||||
Foreign currency remeasurement (income) loss | | | (159) | | | 40 | ||||||
Changes in operating assets and liabilities | | | | | | | | | | | | |
Rents and other receivables, net | | | (1,998) | | | (1,914) | | | (536) | | | (1,998) |
Prepaid expenses | | | 35 | | | (3,925) | | | (1,259) | | | 35 |
Due from affiliates, net | | | 7,314 | | | — | ||||||
Due to/from affiliates, net | | | (1,085) | | | 7,314 | ||||||
Other assets | | | (425) | | | 1,867 | | | (127) | | | (425) |
Accounts payable and accrued liabilities | | | (11,815) | | | 3,535 | | | 2,548 | | | (11,815) |
Advance rents, security deposits and other liabilities | | | (3,601) | | | 1,369 | | | 2,374 | | | (3,601) |
Deferred income | | | 6,791 | | | 7,564 | | | 4,283 | | | 6,791 |
Net cash provided by operating activities | | | 99,431 | | | 91,526 | | | 133,366 | | | 99,431 |
| | | | | | | | | | | | |
Cash flow from investing activities: | | | | | | | | | | | | |
Proceeds from sale of property, net | | | 52,722 | | | 1,496 | | | — | | | 52,722 |
Acquisitions, net of cash acquired | | | (44,150) | | | (24,626) | | | (1,797) | | | (44,150) |
Additions to property and equipment | | | (205,487) | | | (248,852) | | | (377,655) | | | (205,487) |
Net cash used in investing activities | | | (196,915) | | | (271,982) | | | (379,452) | | | (196,915) |
| | | | | | | | | | | | |
Cash flow from financing activities: | | | | | | | | | | | | |
Credit facility proceeds | | | 213,311 | | | 231,000 | | | 298,405 | | | 213,311 |
Credit facility repayments | | | (210,000) | | | (362,000) | | | (108,000) | | | (210,000) |
Payment of deferred financing costs | | | (141) | | | (606) | | | (101) | | | (141) |
Payment of preferred unit dividends | | | (14,090) | | | (635) | | | (14,090) | | | (14,090) |
Payment of dividends to QTS Realty Trust, Inc. | | | (45,332) | | | (40,641) | | | (54,020) | | | (45,332) |
Partnership distributions | | | (5,669) | | | (5,289) | | | (6,068) | | | (5,669) |
Proceeds from exercise of stock options | | | 3,357 | | | 18 | | | 882 | | | 3,357 |
Payment of tax withholdings related to equity-based awards | | | (2,523) | | | (1,233) | | | (3,327) | | | (2,523) |
Principal payments on finance lease obligations | | | (1,560) | | | (4,316) | | | (1,275) | | | (1,560) |
Mortgage principal debt repayments | | | (26) | | | (32) | | | (29) | | | (26) |
Preferred unit issuance proceeds, net of costs | | | — | | | 408,415 | ||||||
Common unit issuance proceeds, net of costs | | | 159,026 | | | — | | | 134,077 | | | 159,026 |
Net cash provided by financing activities | | | 96,353 | | | 224,681 | | | 246,454 | | | 96,353 |
Effect of foreign currency exchange rates on cash and cash equivalents | | | 9 | | | — | | | 453 | | | 9 |
Net increase (decrease) in cash and cash equivalents | | | (1,122) | | | 44,225 | ||||||
Net change in cash and cash equivalents | | | 821 | | | (1,122) | ||||||
Cash and cash equivalents, beginning of period | | | 11,759 | | | 8,243 | | | 15,653 | | | 11,759 |
Cash and cash equivalents, end of period | | $ | 10,638 | | $ | 52,468 | | $ | 16,474 | | $ | 10,638 |
See accompanying notes to financial statements.
16
QUALITYTECH, LP
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (continued)
(unaudited and in thousands)
For the six months ended June 30, 20192020 and 20182019
| | | | | | | | | | | | |
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION | | | | | | | | | | | | |
Cash paid for interest (excluding deferred financing costs and amounts capitalized) | | $ | 27,828 | | $ | 25,647 | | $ | 28,059 | | $ | 27,828 |
Noncash investing and financing activities: | | | | | | | | | | | | |
Accrued capital additions | | $ | 43,780 | | $ | 67,708 | | $ | 118,627 | | $ | 43,780 |
Net increase (decrease) in other assets/liabilities related to change in fair value of derivative contracts | | $ | (28,459) | | $ | 8,545 | ||||||
Net decrease in other assets/liabilities related to change in fair value of derivative contracts | | $ | (38,688) | | $ | (28,459) | ||||||
Equity received in unconsolidated entity in exchange for real estate assets | | $ | 25,280 | | $ | — | | $ | — | | $ | 25,280 |
Increase in assets in exchange for finance lease obligation | | $ | 45,024 | | $ | — | | $ | — | | $ | 45,024 |
Accrued equity issuance costs | | $ | 385 | | $ | 777 | | $ | 405 | | $ | 385 |
Accrued preferred unit distribution | | $ | 5,938 | | $ | 2,576 | | $ | 5,938 | | $ | 5,938 |
Accrued deferred financing costs | | $ | — | | $ | 14 |
See accompanying notes to financial statements.
17
QTS REALTY TRUST, INC.
QUALITYTECH, LP
NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS
1. Description of Business
QTS Realty Trust, Inc., (“QTS”) through its controlling interest in QualityTech, LP (the “Operating Partnership” and collectively with QTS and its subsidiaries, the “Company,” “we,” “us,” or “our”) and the subsidiaries of the Operating Partnership, is engaged in the business of owning, acquiring, constructing, redeveloping and managing multi-tenant data centers. As of June 30, 20192020 our portfolio consisted of 2625 owned and leased properties, including properties associated witha property owned by an unconsolidated entities,entity, with data centers located throughout the United States, Canada Europe and Asia.Europe.
QTS elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes, commencing with its taxable year ended December 31, 2013. As a REIT, QTS generally is not required to pay federal corporate income taxes on its taxable income to the extent it is currently distributed to its stockholders.
The Operating Partnership is a Delaware limited partnership formed on August 5, 2009 and is QTS’ historical predecessor. As of June 30, 2019,2020, QTS owned approximately 89.3%90.2% of the interests in the Operating Partnership. Substantially all of QTS’ assets are held by, and QTS’ operations are conducted through, the Operating Partnership. QTS’ interest in the Operating Partnership entitles QTS to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to QTS’ percentage ownership. As the sole general partner of the Operating Partnership, QTS generally has the exclusive power under the partnership agreement of the Operating Partnership to manage and conduct the Operating Partnership’s business and affairs, subject to certain limited approval and voting rights of the limited partners. QTS’ board of directors manages the Company’s business and affairs.
2. Summary of Significant Accounting Policies
Basis of Presentation – The accompanying financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2018,2019, filed with the SEC on February 25, 2019.28, 2020. The consolidated balance sheet data included herein as of December 31, 20182019 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.
The accompanying financial statements are presented for both QTS Realty Trust, Inc. and QualityTech, LP. References to “QTS” mean QTS Realty Trust, Inc. and its controlled subsidiaries and references to the “Operating Partnership” mean QualityTech, LP and its controlled subsidiaries.
The Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) in accordance with ASCAccounting Standards Codification (“ASC”) Topic 810 Consolidation, and the Company is the primary beneficiary of the VIE. As discussed below, the Company’s only material asset is its ownership interest in the Operating Partnership, and consequently, all of its assets and liabilities represent those assets and liabilities of the Operating Partnership. The Company’s debt is an obligation of the Operating Partnership where the creditors may have recourse, under certain circumstances, against the credit of the Company.
QTS is the sole general partner of the Operating Partnership, and its only material asset consists of its ownership interest in the Operating Partnership. Management operates QTS and the Operating Partnership as one business. The management of QTS consists of the same employees as the management of the Operating Partnership. QTS does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. QTS has not issued or guaranteed any indebtedness. Except for net proceeds from public equity issuances by QTS, which are contributed to the Operating Partnership in exchange for units of limited partnership interest of the Operating Partnership, the Operating Partnership generates all remaining capital required by the business through its operations, the direct or indirect incurrence of indebtedness, and the issuance of partnership units. Therefore,
18
as general partner with control of the Operating Partnership, QTS consolidates the Operating Partnership for financial reporting purposes.
18
The Company believes, therefore, that providingpresents one set of notes for the financial statements of QTS and the Operating Partnership provides the following benefits:
In addition, in light of these combined notes, the Company believes it is important for investors to understand the few differences between QTS and the Operating Partnership in the context of how QTS and the Operating Partnership operate as a consolidated company. With respect to balance sheets, the presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated balance sheets of QTS and those of the Operating Partnership. On the Operating Partnership’s consolidated balance sheets, partners’ capital includes preferred partnership units and common partnership units as well as accumulated other comprehensive income (loss) that are owned by QTS and other partners. On QTS’ consolidated balance sheets, stockholders’ equity includes preferred stock, common stock, additional paid in capital, accumulated other comprehensive income (loss) and accumulated dividends in excess of earnings. The remaining equity reflected on QTS’ consolidated balance sheet is the portion of net assets that are retained by partners other than QTS, referred to as noncontrolling interests. With respect to statements of operations, the primary difference in QTS' Statements of Operations and Statements of Comprehensive Income (Loss) is that for net income (loss), QTS retains its proportionate share of the net income (loss) based on its ownership of the Operating Partnership, with the remaining balance being retained by the Operating Partnership. These combined notes refer to actions or holdings as being actions or holdings of “the Company.” Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, management believes that these general references to “the Company” in this context is appropriate because the business is one enterprise operated through the Operating Partnership.
As discussed above, QTS owns no0 operating assets and has no operations independent of the Operating Partnership and its subsidiaries. Also, the Operating Partnership owns no0 operating assets and has no operations independent of its subsidiaries. Obligations under the 4.75% Senior Notes due 2025 and the unsecured credit facility, both discussed in Note 8,6, are fully, unconditionally, and jointly and severally guaranteed by the Operating Partnership’s existing subsidiaries (other than certain foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS Realty Trust, Inc., the Operating Partnership, QTS Finance Corporation (the co-issuer of the 4.75% Senior Notes due 2025) or any subsidiary guarantor. The indenture governing the 4.75% Senior Notes due 2025 restricts the ability of the Operating Partnership to make distributions to QTS, subject to certain exceptions, including distributions required in order for QTS to maintain its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”).
The interim consolidated financial statements of QTS Realty Trust, Inc. include the accounts of QTS Realty Trust, Inc. and its majority owned subsidiaries.controlled subsidiaries including the Operating Partnership as well as unconsolidated entities accounted for using equity method accounting. This includes the operating results of the Operating Partnership for all periods presented.
Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts and deferred tax assets and the valuation of derivatives, real estate assets, acquired intangible assets and certain accruals. The impacts of the COVID-19 pandemic increases uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates and judgments may be subject to greater volatility than has been the case in the past.
19
Principles of Consolidation – The consolidated financial statements of QTS Realty Trust, Inc. include the accounts of QTS Realty Trust, Inc. and its controlled subsidiaries. The consolidated financial statements of QualityTech, LP include the accounts of QualityTech, LP and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in the financial statements.
We evaluate our investments in unconsolidatedless than wholly owned entities to determine whether they should be recorded on a consolidated basis. The percentage of ownership interest in the entity, an evaluation of control and whether a VIE exists are all considered in our consolidation assessment. Investments in real estate entities which we have the ability to exercise significant influence, but do not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, our share of the earnings or losses of these entities is included in consolidated net income (loss).
Variable Interest Entities (VIEs) – We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.
We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE. Determining which reporting entity, if any, has a controlling financial interest inis the primary beneficiary of a VIE is primarily a qualitative approach focused on identifying which reporting entity has both (1) the power to direct the activities of a VIE that most significantly impact such entity’s economic performance and (2) the obligation to absorb losses or the right to receive benefits from such entity that could potentially be significant to such entity. Performance of that analysis requires the exercise of judgment.
19
We consider a variety of factors in identifying the entity that holds the power to direct matters that most significantly impact the VIE’s economic performance including, but not limited to, the ability to direct financing, leasing, construction and other operating decisions and activities. In addition, we consider the rights of other investors to participate in those decisions, to replace the manager and to sell or liquidate the entity. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion continually.upon a reconsideration event. As of June 30, 2019,2020, we had one1 unconsolidated entity that was considered a VIE for which we are not the primary beneficiary. Our maximum exposure to losses associated with this VIE is limited to our aggregatenet investment, which was approximately $33$27.8 million as of June 30, 2019.
Reclassifications – Revenue categories in the statement of operations for the three and six months ended June 30, 2018 have been reclassified to conform to 2019 presentation which is presented in accordance with ASC 842 and the reclassifications consists of two categories instead of four categories presented historically. The statement of operations for the three months ended June 30, 2018 incorporates a reclassification of $1.4 million of straight line rent from the “Other” line item into the “Rental” line item, a reclassification of $10.4 million of “Recoveries from Customers” from its own line item into the “Rental” line item, as well as the combination of $11.0 million of what was previously classified as “Cloud and managed services” revenue and $0.2 million of remaining “Other” revenue into a single “Other” line item. The statement of operations for the six months ended June 30, 2018 incorporates a reclassification of $4.1 million of straight line rent from the “Other” line item into the “Rental” line item, a reclassification of $22.0 million of “Recoveries from Customers” from its own line item into the “Rental” line item, as well as the combination of $24.2 million of what was previously classified as “Cloud and managed services” revenue and $0.8 million of remaining “Other” revenue into a single “Other” line item.2020.
Real Estate Assets – Real estate assets are reported at cost. All capital improvements for the income-producing properties that extend their useful lives are capitalized to individual property improvements and depreciated over their estimated useful lives. Depreciation for real estate assets is generally provided on a straight-line basis over 40 years from the date the property was placed in service. Property improvements are depreciated on a straight-line basis over the life of the respective improvement ranging from 20 to 40 years from the date the components were placed in service.
20
Leasehold improvements are depreciated over the lesser of 20 years or through the end of the respective life of the lease. Repairs and maintenance costs are expensed as incurred. For the three months ended June 30, 2020, depreciation expense related to real estate assets and non-real estate assets was $34.7 million and $3.3 million, respectively, for a total of $38.0 million. For the three months ended June 30, 2019, depreciation expense related to real estate assets and non-real estate assets was $29.5 million and $2.9 million, respectively, for a total of $32.4 million. For the threesix months ended June 30, 2018,2020, depreciation expense related to real estate assets and non-real estate assets was $25.0$67.0 million and $3.1$6.7 million, respectively, for a total of $28.1$73.7 million. For the six months ended June 30, 2019, depreciation expense related to real estate assets and non-real estate assets was $57.0 million and $5.8 million, respectively, for a total of $62.8 million. For the six months ended June 30, 2018, depreciation expense related to real estate assets and non-real estate assets was $48.6 million and $6.4 million, respectively, for a total of $55.0 million. We capitalize certain real estate development costs, including internal costs incurred in connection with development. The capitalization of costs during the construction period (including interest and related loan fees, property taxes and other direct and indirect project costs) begins when development efforts commence and ends when the asset is ready for its intended use. The capitalization of internal costs increases construction in progress recognized during development of the related property and the cost of the real estate asset when placed into service and such costs are depreciated over its estimated useful life. Capitalization of such costs, excluding interest, aggregated to $4.0$4.8 million and $3.7$4.0 million for the three months ended June 30, 20192020 and 2018,2019, respectively, and $8.5$9.3 million and $7.2$8.5 million for the six months ended June 30, 20192020 and 2018,2019, respectively. Interest is capitalized during the period of development by applying our weighted average effective borrowing rate to the actual development and other capitalized costs paid during the construction period. Interest is capitalized until the property is ready for its intended use. Interest costs capitalized totaled $8.4$7.7 million and $6.0$8.4 million for the three months ended June 30, 20192020 and 2018,2019, respectively, and $16.2$15.8 million and $11.4$16.2 million for the six months ended June 30, 20192020 and 2018,2019, respectively.
Acquisitions and Sales – Acquisitions of real estate and other entities are either accounted for as asset acquisitions or business combinations depending on facts and circumstances. When substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction is accounted for as an asset acquisition. In an asset acquisition, the purchase price paid for assets acquired is allocated between identified tangible and intangible assets acquired based on relative fair value. Transaction costs associated with asset acquisitions are capitalized. When substantially all of the fair value of assets acquired is not concentrated in a group of similar identifiable assets, the set of assets will generally be considered a business. When accounting for business combinations, purchase accounting is applied to the assets and liabilities related to all real estate investments acquired in accordance with the accounting requirements of ASC Topic 805, Business Combinations, which requires the recording of net assets of acquired businesses at fair value. The fair value of the consideration transferred is assigned to the acquired tangible assets, consisting primarily of land, construction in progress, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases, value of customer relationships trade names, software intangibles and finance leases. The excess of the fair value of liabilities assumed, common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to goodwill, which is not amortized. Transaction costs associated with business combinations are expensed as incurred.
In developing estimates of fair value of acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement
20
cost for fixed assets and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets.
Acquired in-place leases are amortized as amortization expense on a straight-line basis over the remaining life of the underlying leases. This amortization expense is accounted for as real estate amortization expense.
Acquired customer relationships are amortized as amortization expense on a straight-line basis over the expected life of the customer relationship. ThisThese amortization expense isexpenses are accounted for as real estate amortization expense.
Other acquired intangible assets, which includes platform, aboveAbove or below market leases and trade name intangibles, are amortized on a straight-line basis over their respective expected lives. Above or below market leaseslives and are amortizedrecorded as a reduction to or increase in rental revenue when we are the lessor as well as a reduction to or increase in rent expense over the remaining lease terms when we are the lessee. The expense associated with trade name intangibles is
During the six months ended June 30, 2020, we completed acquisitions of land in Atlanta, Georgia totaling 2.1 acres adjacent to our Atlanta (DC-1) and Atlanta (DC-2) data centers for an aggregate purchase price of approximately $1.8 million. These acquisitions were accounted for as real estate amortization expense, whereasasset acquisitions and were included within the expense associated with“Construction in Progress” line item of the amortizationconsolidated balance sheets at the time of platform intangibles is accounted for as non-real estate amortization expense.acquisition.
21
We account for the sale of assets to non-customers under Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which provides for recognition or derecognition based on transfer of ownership. During the six months ended June 30, 2019, we sold our Manassas facility to an unconsolidated affiliateentity in exchange for cash consideration and noncash consideration in the form of an equity interest in the unconsolidated entity. After measuring the consideration received at fair value, we recognized a $13.4 million gain on sale of real estate, net of approximately $5.8 million of transaction costs, associated with our contribution of certain assets in our Manassas facility to the unconsolidated entity. Substantially all of the fair value of the assets contributed to the entity was concentrated in a group of similar identifiable assets and the sale of the assets were not to a customer, therefore the transaction was accounted for as an asset sale. The gain on sale of real estate iswas included within the “Gain on sale of real estate, net” line item of the consolidated statements of operations.
Impairment of Long-Lived Assets, Intangible Assets and Goodwill – We review our long-lived assets, and intangible assets and equity method investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset group. If the net carrying value of the asset group exceeds the value of the undiscounted cash flows, the fair value of the asset group is assessed and may be considered impaired. An impairment loss is recognized based on the excess of the carrying amount of the impaired asset over its fair value. NoNaN impairment losses were recorded for the three and six months ended June 30, 2019. We recognized $3.1 million2020 and $7.1 million of impairment losses related to certain non-real estate product related assets during the three and six months ended June 30, 2018, respectively, which was included in the “Restructuring” line item of the consolidated statement of operations.2019.
The fair value of goodwill is the consideration transferred in a business combination which is not allocable to identifiable intangible and tangible assets. Goodwill is subject to at least an annual assessment for impairment. In connection with the goodwill impairment evaluation that we performed as of October 1, 2018,2019, we determined qualitatively that it is not more likely than not that the fair value of our one1 reporting unit was less than the carrying amount, thus we did not perform a quantitative analysis. As we continue to operate and assess our goodwill at the consolidated level for our single reporting unit and our market capitalization significantly exceeds our net asset value, further analysis was not deemed necessary as of June 30, 2019.
Assets Held for Sale – We completed the sale of the Manassas facility to an unconsolidated entity on February 22, 2019. As of December 31, 2018, prior to our sale of the assets to the entity, the completion of the sale was probable and we accordingly reclassified certain assets, as well as liabilities associated with those assets, as held for sale. As of December 31, 2018, the asset value of $71.8 million associated with the held for sale assets was included within the “Assets held for sale” line item of the consolidated statements of financial position and primarily consisted of construction in progress. As of December 31, 2018, the liability value of $24.3 million associated with the held for sale liabilities was included within the “Liabilities held for sale” line item of the consolidated statements of financial position and primarily consisted of accounts payable and accrued liabilities associated with construction in progress assets. See Note 7 for further discussion of the unconsolidated entity.2020.
Cash and Cash Equivalents – We consider all demand deposits and money market accounts purchased with a maturity date of three months or less at the date of purchase to be cash equivalents. Our account balances at one or more institutions periodically exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is concentration of credit risk related to amounts on deposit in excess of FDIC coverage. We mitigate this risk by depositing a majority of our funds with several major financial institutions. We also have not experienced any losses and do not believe that the risk is significant.
Deferred Costs – Deferred costs, net, on our balance sheets include both deferred financing costs and deferred leasing costs.
21
Deferred financing costs represent fees and other costs incurred in connection with obtaining debt and are amortized over the term of the loan and are included in interest expense. Debt issuance costs related to revolving debt arrangements are deferred and presented as assets on the balance sheet; however, all other debt issuance costs are recorded as a direct offset to the associated liability. Amortization of debt issuance costs, including those costs presented as offsets to the
22
associated liability in the consolidated balance sheet, was $1.0 million for botheach of the three months ended June 30, 20192020 and 2018, respectively,2019, and $2.0 million and $1.9 million for each of the six months ended June 30, 20192020 and 2018, respectively. Deferred financing costs presented as assets on the balance sheet related to revolving debt arrangements, net of accumulated amortization, are as follows:2019.
| | | | | | |
| | June 30, | | December 31, | ||
(dollars in thousands) |
| 2019 |
| 2018 | ||
| | (unaudited) | | | | |
| | | | | | |
Deferred financing costs | | $ | 11,488 | | $ | 11,530 |
Accumulated amortization | | | (4,812) | | | (3,859) |
Deferred financing costs, net | | $ | 6,676 | | $ | 7,671 |
Deferred financing costs presented as offsets to the associated liabilities on the balance sheet related to fixed debt arrangements, net of accumulated amortization, are as follows:
| | | | | | |
| | June 30, | | December 31, | ||
(dollars in thousands) |
| 2019 |
| 2018 | ||
| | (unaudited) | | | | |
| | | | | | |
Deferred financing costs | | $ | 14,608 | | $ | 14,501 |
Accumulated amortization | | | (3,947) | | | (2,944) |
Deferred financing costs, net | | $ | 10,661 | | $ | 11,557 |
Initial direct costs, or deferred leasing costs, include commissions paid to third parties, including brokers, leasing and referral agents, and internal sales commissions paid to employees for successful execution of lease agreements and are accounted for pursuant to ASC Topic 842, Leases. These costs are incurred when we execute lease agreements and represent only incremental costs that would not have been incurred if the lease agreement had not been executed. To a lesser extent, we incur the same incremental costs to obtain managed serviceservices and cloud contracts with customers that are accounted for pursuant to ASC Topic 606, Revenue from Contracts with Customers. Because the framework of accounting for these costs and the underlying nature of the costs are the same for our revenue and lease contracts, the costs are presented on a combined basis within our financial statements and within the below table.statements. Both revenue and leasing commissions are capitalized and generally amortized over the term of the related leases or the expected term of the contract using the straight-line method. If a customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the lease are written off to amortization expense. Amortization of deferred leasing costs totaled $5.7$6.3 million and $5.3$5.7 million for the three months ended June 30, 20192020 and 2018,2019, respectively, and $11.1$12.5 million and $10.2$11.1 million for the six months ended June 30, 2020 and 2019, and 2018, respectively. Deferred leasing costs, net of accumulated amortization, are as follows:
| | | | | | |
| | June 30, | | December 31, | ||
(dollars in thousands) |
| 2019 |
| 2018 | ||
| | (unaudited) | | | | |
| | | | | | |
Deferred leasing costs | | $ | 69,763 | | $ | 63,018 |
Accumulated amortization | | | (29,777) | | | (25,593) |
Deferred leasing costs, net | | $ | 39,986 | | $ | 37,425 |
Revenue Recognition – We derive our revenues from leases with customers for data center space which include lease components and nonlease revenue components, such as power, tenant recoveries, cloud and managed services. We adopted Accounting Standards Codification (“ASC”) Topic 842, Leases, the new accounting standard for leases, effective January 1, 2019 using the modified retrospective approach. In addition, we adopted ASC Topic 606, Revenue from Contracts with Customers, the new accounting standard for revenue from contracts with customers, effective January 1, 2018 using the modified retrospective approach. We have elected the available practical expedient under ASC Topic 842, Leases, to combine our nonlease revenue components that have the same pattern of transfer as the related operating lease component into a
23
single combined lease component. The single combined component is accounted for under ASC 842. SeeTopic 842 if the “Recently Adopted Accounting Standards” section belowlease component is the predominant component and is accounted for further details.under ASC Topic 606 if the nonlease components are the predominant components.
A description of each of our disaggregated revenue streams is as follows:
Rental Revenue
Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line basis over the customer lease term. Occasionally, customer leases include options to extend or terminate the lease agreements. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or recognizing rental revenue unless it is reasonably certain the customer will exercise these extension or termination options.
Rental revenue also includes revenue from power delivery on fixed power arrangements, whereby customers are billed and pay a fixed monthly fee per committed available amount of connected power. These fixed power arrangements require us to provide a series of distinct services and to stand ready to deliver the power over the contracted term which is co-terminus with the lease. Customer fixed power arrangements have the same pattern of transfer over the lease term as the lease component and are therefore combined with the lease component to form a single lease component that is recognized over the term of the lease on a straight line basis.
In addition, rental revenue includes straight line rent. Straight line rent represents the difference in rents recognized during the period versus amounts contractually due pursuant to the underlying leases and is recorded as deferred rent receivable/payable in the consolidated balance sheets. For lease agreements that provide for scheduled rent increases, rental income is recognized on a straight-line basis over the non-cancellable term of the leases, which commences when control of the space has been provided to the customer. The amount of the straight-line rent receivable on the balance sheets included in rents and other receivables, net was $32.4$47.6 million and $29.7$38.7 million as of June 30, 20192020 and December 31, 2018,2019, respectively.
22
Rental revenue also includes amortization of set-up fees which are amortized over the term of the respective lease as discussed below.
Variable Lease Revenue from Recoveries
Certain customer leases contain provisions under which customers reimburse us for power and cooling-related charges as well as a portion of the property’s real estate taxes, insurance and other operating expenses. Recoveries of power and cooling-related expenses relate specifically to our variable power arrangements, whereby customers pay variable monthly fees for the specific amount of power utilized at the current utility rates. Our performance obligation is to stand ready to deliver power over the life of the customer contract up to a contracted power capacity. Customers have the flexibility to increase or decrease the amount of power consumed, and therefore sub-metered power revenue is constrained at contract inception. The reimbursements are included in revenue as recoveries from customers and are recognized each month as the uncertainty related to the consideration is resolved (i.e. we provide power to our customers) and customers utilize the power. Reimbursement of real estate taxes, insurance, common area maintenance, or other operating expenses are accounted for as variable payments under lease guidance pursuant to the practical expedient and are recognized as revenue in the period that the expenses are recognized. Variable lease revenue from recoveries discussed above, including power, common area maintenance or other operating costs, have the same pattern of transfer over the lease term as the lease component and are therefore combined with the lease component to form a single lease component. Variable lease revenue from recoveries is included within the “rental” line item of the statementstatements of operations.
Other Revenue
Other revenue primarily consists of revenue from our cloud and managed service offerings.offerings, as well as revenue earned from partner channel, management and development fees. We, through our TRS,Taxable REIT Subsidiaries (“TRS”), may provide both our cloud product and use of our managed services to our customers on an individual or combined basis. In both our cloud and managed services offerings the TRS’s performance obligation is to provide services (e.g. cloud hosting, data backup, data storage or data center personnel labor hours) to facilitate a fully integrated information technology (“IT”) outsourcing environment over a contracted term. Although underlying services may vary, over the contracted term monthly service offerings are substantially the same and we account for the services as a series of
24
distinct services in accordance with ASC Topic 606. Service fee revenue is recognized as the revenue is earned, which generally coincides with the services being provided. As we have the right to consideration from customers in an amount that corresponds directly with the value to the customer of the TRS’s performance of providing continuous services, we recognize monthly revenue for the amount invoiced.
With respect to the transaction price allocated to remaining performance obligations within our cloud and managed service contracts, we have elected to use the optional exemption provided by ASC Topic 606 whereby we are not required to estimate the total transaction price allocated to remaining performance obligations as we apply the “right-to-invoice” practical expedient. As described above, the nature of our performance obligation in these contracts is to provide monthly services that are substantially the same and accounted for as a series of distinct services. These contracts generally have a remaining term ranging from month-to-month to three years.
Management fees and other revenues are generally received from our unconsolidated affiliateentity properties as well as third parties. Management fee revenue is earned based on a contractual percentage of unconsolidated affiliateentity property revenue. Development fee revenue is earned on a contractual percentage of hard costs to develop a property. We recognize revenue for these services provided when earned based on the performance criteria in ASC Topic 606, with such revenue recorded in “Other” revenue on the consolidated statementstatements of operations.
Leases as Lessee – We determine if an arrangement is a lease at inception. If the contract is considered a lease, we evaluate leased property to determine whether the lease should be classified as a finance or operating lease in accordance with U.S. GAAP. We periodically enter into finance leases for certain data center facilities, equipment, and fiber optic transmission cabling. Finance lease assets are included within the “Buildings, improvements and equipment” line item of the consolidated balance sheets and finance lease liabilities are included within “Finance leases and mortgage notes payable” line item of the consolidated balance sheets. In addition, we lease certain real estate (primarily land or real
23
estate space) under operating lease agreements with such assets included within the “Operating lease right of use assets, net” line item of the consolidated balance sheets and the associated lease liabilities included within the “Operating lease liabilities” line item on the consolidated balance sheets.
Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As our leases as lessee typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We assess multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Many of our lease agreements include options to extend the lease, which we do not include in our expected lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
Allowance for Uncollectible Accounts Receivable – We record a provision for uncollectible accounts if a receivable balance relating to contractual rent, rental revenue recorded on a straight-line basis, tenant recoveries or other billed amountslease components from an individual contract is considered by management to be not probable of collection, and this provision is recorded as a reduction to leasing revenues. We also record a general provision of estimated uncollectible tenant receivables that is based on management’s historical experience and a reviewgeneral probability of the current status of our receivables.collection in accordance with ASC 450-20 Loss Contingencies. This provision is recorded as bad debt expense and recorded within Propertythe “Property Operating Costs withinCosts” line item of the consolidated statementstatements of operations. The aggregate allowance for doubtful accounts on the consolidated balance sheetsheets was $3.5$6.5 million and $3.8$2.3 million as of June 30, 20192020 and December 31, 2018,2019, respectively.
Advance Rents and Security Deposits – Advance rents, typically prepayment of the following month’s rent, consist of payments received from customers prior to the time they are earned and are recognized as revenue in subsequent periods when earned. Security deposits are collected from customers at the lease origination and are generally refunded to customers upon lease expiration.
Deferred Income – Deferred income generally results from non-refundable charges paid by the customer at lease inception to prepare their space for occupancy. We record this initial payment, commonly referred to as set-up fees, as a deferred income liability which amortizes into rental revenue over the term of the related lease on a straight-line basis. Deferred income was $40.0$43.5 million and $33.2$39.2 million as of June 30, 20192020 and December 31, 2018,2019, respectively. Additionally, $3.8$4.5 million and $3.2$3.8 million of deferred income was amortized into revenue for the three months ended June 30, 20192020 and 2018,2019, respectively, and $7.1$8.4 million and $6.1$7.1 million for the six months ended June 30, 20192020 and 2018,2019, respectively.
Foreign Currency - The financial position of foreign subsidiaries is translated at the exchange rates in effect at the end of the period, while revenues and expenses are translated at average exchange rates during the period. Gains or losses from translation of foreign operations where the local currency is the functional currency are included as components of other comprehensive income (loss). GainsPrior to February 2020, gains or losses from foreign currency transactions arewere 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-based Compensation – Equity-based compensation costs are measured based upon their estimated fair value on the date of grant or modification and amortized ratably over their respective service periods. We have elected to account for forfeitures as they occur. Equity-based compensation expense net of forfeited and repurchased awards was $4.3$6.1 million and $4.0$4.3 million for the three months ended June 30, 20192020 and 2018,2019, respectively, and $7.6$11.0 million and $7.5$7.6 million for the six months ended June 30, 2020 and 2019, and 2018, respectively. Equity based compensation expense for the three and six months ended June 30, 2018 excludes $1.7 million and $3.1 million, respectively, of equity based compensation expense associated with the acceleration of equity awards related to certain employees impacted by our strategic growth
25
plan. The aforementioned equity based compensation expense was included in the “Restructuring” expense line item on the consolidated statements of operations.
Segment Information – We manage our business as one1 operating segment and thus one1 reportable segment consisting of a portfolio of investments in multiple data centers.
24
Customer Concentrations – As ofDuring the six months ended June 30, 2019, one2020, 1 of our customers represented 11.3% of our total monthly rental revenue. No other customers exceeded 6%10% of total monthly rental revenue.revenues, representing approximately 10.6% of total revenues for the six months ended June 30, 2020.
As of June 30, 2019,2020, three of our customers exceeded 5% of trade accounts receivable. In aggregate, these three customers accounted for approximately 20%25% of trade accounts receivable. None of these customers individually exceeded 10% of total trade accounts receivable.
Income Taxes – We have elected for two2 of our existing subsidiaries to be taxed as taxable REIT subsidiaries pursuant to the REIT rules of the U.S. Internal Revenue Code. Pursuant to the transaction described in Note 3 - Acquisitions, weWe also have subsidiaries subject to tax in non-US jurisdictions.
For the taxable REIT subsidiaries, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.
A current and deferredAn income tax expensebenefit has been recognized in the six months ended June 30, 2019,2020, in connection with recorded operating activity. As of June 30, 2019, one2020, 1 of our taxable REIT subsidiaries is in a net deferred tax liability position primarily due to a valuation allowance against certain deferred tax assets. In considering whether it is more likely than not that some portion or all of the deferred tax assets will be realized, it has been determined that it is possible that some or all of our deferred tax assets could ultimately expire unused. We establish valuation allowances against deferred tax assets when the ability to fully utilize these benefits is determined to be uncertain.
We provide a valuation allowance against deferred tax assets if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The evidence contemplated by management at June 30, 20192020 consists of current and prior operating results, available tax planning strategies, and the scheduled reversal of existing taxable temporary differences. Evidence from the scheduled reversal of taxable temporary differences relies on management judgements based on the accumulation of available evidence. Those judgements may be subject to change in the future as evidence available to management changes. Management’s assessment of our valuation allowance may further change based on our generation of or ability to project future operating income, and changes in tax policy or tax planning strategies.
We provide for income taxes during interim periods based on the estimated effective tax rate for the year. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the taxable REIT subsidiaries, tax law changes, and future business acquisitions or divestitures. The taxable subsidiaries’ effective tax rates were (6.6%)1.2% and 10.8%(6.6)% for the six months ended June 30, 2020 and 2019, respectively.
On March 27, 2020, the United States enacted the Coronavirus Aid, Relief and 2018, respectively.Economic Security Act (CARES Act). The CARES Act is an emergency economic stimulus package that includes measures and tax provisions to strengthen the United States economy and fund a nationwide effort to curtail the effect of COVID-19. The CARES Act provides tax changes in response to the COVID-19 pandemic. Some of the provisions which may impact the Company’s financial statements include the removal of certain limitations on utilization of net operating losses, increasing the ability to deduct interest expense, and amending certain provisions of the previously enacted Tax Cuts and Jobs Act. Due to the recent enactment of the CARES Act, the Company is currently evaluating the impact, if any that the CARES Act will have on its consolidated financial statements. The Company has not yet identified any material impacts that may result from the CARES Act.
Fair Value Measurements – ASC Topic 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is established that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable
25
(observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).
26
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.
As of June 30, 2019,2020, we valued our derivative instruments primarily utilizing Level 2 inputs. See Note 1614 – ‘Fair Value of Financial Instruments’ for additional details.
Recently Adopted Accounting StandardsCOVID-19
Revenue from Contracts – We continue to actively monitor developments with Customers
In May 2014,respect to COVID-19 and have taken numerous actions based on corporate policies specifically focusing on the Financial Accounting Standards Board (“FASB”) issued guidance codified in ASC Topic 606, Revenue from Contracts with Customers, which supersedessafety and wellness of our customers, partners, and employees, as well as providing continuous and resilient services. Although the former revenue recognition requirements in ASC Topic 605, Revenue Recognition. Under this new guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The standard establishes a five-step model framework which recognizes revenue as an entity transfers control of goods or servicesCOVID-19 pandemic has caused significant disruptions to the customerUnited States and requires enhanced disclosures. We adopted ASC Topic 606 effective January 1, 2018,global economy and elected the modified retrospective transition approach. The adoption didhas contributed to significant volatility and negative pressure in financial markets, as of June 30, 2020, these developments have not result inhad a cumulative catch-up adjustment to opening equity and does not change the recognition patternknown material adverse effect on our business. As of June 30, 2020, each of our data centers in North America and Europe are fully operational and operating revenues.
Leases
In February 2016, and further amended in 2018, the FASB issued ASC Topic 842, Leases, which supersedes the former lease guidance in ASC 840, Leases. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.
We adopted ASC 842 effective January 1, 2019 using the modified retrospective approach, which applied the provisionsaccordance with our business continuity plans. Across each of the new guidance at the effective date without adjusting comparative periods presented. We elected a package of practical expedients permitted under the transition guidance within the new standardrespective jurisdictions in which we operate, our business has been deemed essential operations, which has allowed us to not reassess (i) whether expired or existing contracts contain a lease under the new standard, (ii) the lease classificationremain fully staffed with critical personnel in place to continue to provide service and support for existing leases or (iii) whether previously-capitalized initial direct costs would qualify for capitalization under the new standard. We did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment.our customers.
The adoption of ASC 842 impactedextent to which the COVID-19 pandemic impacts our consolidated balance sheetbusiness and operations remains largely uncertain and will depend on future developments that are highly uncertain and cannot be predicted with confidence, including the recognition of existing operating leases as lessee resulting in $62.9 million of ROU assetsduration and $70.7 million of lease liabilities recorded as of January 1, 2019. We also recognized a $1.8 million cumulative effect adjustment to retained earnings. The adjustment to retained earnings was due to an impairment of certain ROU assets associated with vacant office space for which we are a lessee and
27
assumed in a prior acquisition. See the table below for the impact of adoptionscope of the lease standard on our consolidated balance sheetpandemic, new information that may emerge concerning the severity of COVID-19, the response of the overall economy and financial markets and the actions taken to contain COVID-19 or treat its impact, such as government actions, laws or orders or any changes or amendments thereto and the success of January 1, 2019 (in thousands):
| | | | | | | | | |
| | As Previously | | New Lease Standard | | | |||
| | Reported | | Adjustment | | As Adjusted | |||
Operating lease right-of-use assets | | $ | — | | $ | 62,922 | | $ | 62,922 |
Operating lease liabilities | | | — | | | 70,657 | | | 70,657 |
Deferred rent payable | | | 5,922 | | | (5,922) | | | — |
As lessor, accounting for our leases will remain largely unchanged from ASC 840. The new lease standard more narrowly defines initial direct costsany lifting or easing of, or the risk of any premature lifting or easing of, any such restrictions, among others. Due to uncertainties regarding COVID-19, any estimates of the effects of COVID-19 as only costs thatreflected and/or discussed in these financial statements are incrementalbased upon the Company’s best estimates using information known to origination of a lease (i.e. costs that would not have been incurred had the lease not been obtained). We did not historically capitalize non-incremental costs, thereforeCompany at this time, and such estimates may change will have no impact on the accounting for initial direct costs in the consolidated financial statements on a prospective basis.near term, the effects of which could be material.
Additionally, from a lessor perspective, we elected a practical expedient which allows lessors to combine nonlease components with the related lease components if both the timing and pattern of transfer are the same for the nonlease component(s) and related lease component, and the lease component would be classified as an operating lease. The single combined component is accounted for under ASC 842 if the lease component is the predominant component and is accounted for under ASC 606 if the nonlease components are the predominant components. Lessors are permitted to apply the practical expedient to all existing leases on a retrospective or prospective basis. We elected the practical expedient to combine our lease and nonlease components that meet the defined criteria and will account for the combined lease component under ASC 842 on a prospective basis.
New Accounting Pronouncements
In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 eliminate the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, valuation processes for Level 3 fair value measurements, and policy for timing of transfers between levels. ASU 2018-13 also provides clarification in the measurement uncertainty disclosure by explaining that the disclosure is to communicate information about the uncertainty in measurement as of the reporting date. In addition, ASU 2018-13 added the following requirements: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. Finally, ASU 2018-13 updated language to further encourage entities to apply materiality when considering de minimus determination for disclosure requirements. The guidance will be applied retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with the exception of amendments to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used for Level 3 fair value measurements, and the narrative
26
description of measurement uncertainty which will be applied prospectively. Early adoption is permitted. We do not expectadopted this ASU effective January 1, 2020, and the provisions of thethis standard willdid not have a material impact on our consolidated financial statements.
In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software (Subtopic(Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract.Contract. The amendments in ASU 2018-15 require an entityclarifies that implementation costs incurred by customers in a service contract hosting arrangement apply Subtopic 350-40 to identify costs to capitalize or expense related tocloud computing arrangements are deferred if they would be capitalized by customers in the service contract.software licensing arrangements under the internal-use software guidance. ASU 2018-15 also requiresclarifies that any capitalized costs should not be recorded to “Depreciation and amortization” in the entityConsolidated Statements of Operations for costs after adoption. ASU 2018-15 is effective for the Company beginning January 1, 2020 and provides for the alternative to capitalizeadopt the implementationASU (a) prospectively only for new costs ofincurred after the service contract hosting arrangement and amortize suchadoption date or (b) by adjusting existing costs overto comply with this standard, including the life of the contract andrequirement to present the capitalizedamortization of costs inoutside “Depreciation and amortization”. We adopted this ASU effective January 1, 2020 using the same line item as fees associated with the hosting service on the statement of income and statement of cash flows. The guidance will be applied retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with the exception ofprospective transition approach to all new implementation costs incurred after adoption. Beginning in the datefirst quarter of adoption which will be applied prospectively. Although permitted, we do not expect to early adopt this standard. We do not expect2020, this standard will have a material impact on our net income. However, this standard will likely resultresults in certain expenses currentlypreviously recognized as non realnon-real estate depreciation being recognized as general and administrative or operating expense. During the three and six months ended June 30, 2020 we did not record any capitalization of implementation costs related to cloud computing arrangements, therefore this standard did not have a material impact on our net income during the three and six months ended June 30, 2020.
In June 2016, the FASB issued ASU 2016-13, Financial Instruments – Credit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments, and subsequent amendments to the guidance: ASU 2018-19 in November 2018, ASU 2019-04 in April 2019, ASU 2019-05 in May 2019, ASUs 2019-10 & 2019-11 in November 2019, and ASU 2020-02 in February 2020. The standard, as amended, requires entities to use a new impairment model based on current expected credit losses (“CECL”) rather than incurred losses. The CECL model is designed to capture expected credit losses through the establishment of an allowance account, which will be presented as an offset to the amortized cost basis of the related financial asset. The guidance is effective for interim and annual periods beginning after December 15, 2019. We adopted this ASU effective January 1, 2020. As the majority of our revenue is generated from operating leases which are governed under ASC Topic 842, the provisions of this standard did not have a material impact on our consolidated financial statements.
In December 2019, the FASB issued ASU 2019-12, Income Taxes (Topic 740): Simplifying the Accounting for Income Taxes. The amendments in this ASU simplify the accounting for income taxes by removing certain exceptions and adding some requirements regarding franchise (or similar) tax, step-ups in a business combination, treatment of entities not subject to tax and when to apply enacted changes in tax laws. This ASU is effective for fiscal years beginning after December 15, 2020 and interim periods within those fiscal years. The amendments related to changes in ownership of foreign equity method investments or foreign subsidiaries should be applied on a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. The amendments related to franchise taxes that are partially based on income should be applied on either a retrospective basis for all periods presented or a modified retrospective basis through a cumulative-effect adjustment to retained earnings as of the beginning of the fiscal year of adoption. All other amendments should be applied on a prospective basis. Early adoption is permitted. We are currently assessing the impact of this standard on our consolidated financial statements.
In January 2020, the FASB issued ASU 2020-01, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction between the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-01 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. Early adoption is permitted. The amendments in this Update should be applied prospectively. We do not expect the provisions of the standard will have a material impact on our consolidated financial statements.
In March 2020, the FASB issued ASU 2020-04, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-04 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-04 is optional and
2827
may be elected over time as reference rate reform activities occur. Beginning in the first quarter of 2020, we have elected to apply the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance and may apply other elections as applicable as additional changes in the market occur.
We determined all other recently issued accounting pronouncements will not have a material impact on our consolidated financial statements or do not materially apply to our operations.
3. Acquisitions
On April 23, 2019, we completed the acquisition of two data centers in the Netherlands (the “Netherlands facilities”) for approximately $44 million in cash consideration, including closing costs. The two facilities, in Groningen and Eemshaven, have approximately 160,000 square feet of raised floor capacity and 30 megawatts of combined gross power capacity built out and fully available. This acquisition was funded with a draw on our unsecured revolving credit facility.
The acquisition was accounted for as an asset acquisition. The purchase price allocation of the Netherlands facilities is a fair value estimate that utilized Level 2 and Level 3 inputs, including discounted future cash flows and observable market data on replacement costs, leasing rates, and discount rates that were used to measure the acquired assets and liabilities on a non-recurring basis.
The following table summarizes the consideration for the Netherlands facilities and the allocation of the fair value of assets acquired and liabilities assumed at the acquisition date (unaudited and in thousands):
| | | | | |
| | Purchase Price Allocation | | Weighted Avg Remaining Useful Life (in years) | |
Land | | $ | 1,743 | | N/A |
Buildings and improvements | | | 8,640 | | 24 |
Construction in progress | | | 29,902 | | N/A |
Acquired intangibles (In-place lease & above market lease) | | | 2,911 | | 3 |
Deferred costs | | | 906 | | 3 |
Other assets | | | 128 | | 3 |
Net Working Capital | | | 554 | | N/A |
Total identifiable assets acquired | | | 44,784 | | |
| | | | | |
Acquired below market lease | | | 284 | | 3 |
Total liabilities assumed | | | 284 | | |
| | | | | |
Net identifiable assets acquired | | $ | 44,500 | | |
29
4.3. Acquired Intangible Assets and Liabilities
Summarized below are the carrying values for the major classes of intangible assets and liabilities (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | |
| | | | June 30, 2019 | | December 31, 2018 | ||||||||||||||
| | | | Gross | | | | | | | | Gross | | | | | | | ||
| | | | Carrying | | Accumulated | | Net Carrying | | Carrying | | Accumulated | | Net Carrying | ||||||
|
| Useful Lives |
| Value |
| Amortization |
| Value |
| Value |
| Amortization |
| Value | ||||||
Customer Relationships | | 12 years | | $ | 95,705 | | $ | (32,436) | | $ | 63,269 | | $ | 95,705 | | $ | (28,461) | | $ | 67,244 |
In-Place Leases | | 0.3 to 10 years | | | 34,622 | | | (19,901) | | | 14,721 | | | 32,066 | | | (17,670) | | | 14,396 |
Solar Power Agreement (1) | | 17 years | | | 13,747 | | | (3,908) | | | 9,839 | | | 13,747 | | | (3,639) | | | 10,108 |
Platform Intangible | | 3 years | | | — | | | — | | | — | | | 9,600 | | | (9,600) | | | — |
Acquired Favorable Leases | | | | | | | | | | | | | | | | | | | | |
Acquired below market leases - as Lessee | | 46 years | | | — | | | — | | | — | | | 2,301 | | | — | | | 2,301 |
Acquired above market leases - as Lessor | | 0.5 to 8 years | | | 5,041 | | | (3,644) | | | 1,397 | | | 4,649 | | | (3,247) | | | 1,402 |
Tradenames | | 3 years | | | — | | | — | | | — | | | 3,100 | | | (3,100) | | | — |
Total Intangible Assets | | | | $ | 149,115 | | $ | (59,889) | | $ | 89,226 | | $ | 161,168 | | $ | (65,717) | | $ | 95,451 |
| | | | | | | | | | | | | | | | | | | | |
Solar Power Agreement (1) | | 17 years | | | 13,747 | | | (3,908) | | | 9,839 | | | 13,747 | | | (3,639) | | | 10,108 |
Acquired Unfavorable Leases | | | | | | | | | | | | | | | | | | | | |
Acquired below market leases - as Lessor | | 1 to 4 years | | | 1,096 | | | (779) | | | 317 | | | 809 | | | (611) | | | 198 |
Acquired above market leases - as Lessee | | 11 to 12 years | | | 2,453 | | | (875) | | | 1,578 | | | 2,453 | | | (767) | | | 1,686 |
Total Intangible Liabilities (2) | | | | $ | 17,296 | | $ | (5,562) | | $ | 11,734 | | $ | 17,009 | | $ | (5,017) | | $ | 11,992 |
Above or below market leases are amortized as a reduction to or increase in rental revenue in the case of the Company as lessor as well as a reduction to or increase in rent expense in the case of the Company as lessee over the remaining lease terms. The net effect of amortization of acquired above-market and below-market leases resulted in a net decrease in rental revenue of $0.1 million and $0.1 million for the three months ended June 30, 2019 and 2018, respectively. The net effect of amortization of acquired above-market and below-market leases resulted in a net decrease in rental revenue of $0.1 million and $0.3 million for the six months ended June 30, 2019 and 2018, respectively. The estimated amortization of acquired favorable and unfavorable leases for each of the five succeeding fiscal years ending December 31 is as follows (unaudited and in thousands):
| | | | | |
| Net Rental Revenue | | Net Rental Expense | ||
| Decrease | | Increase/(Decrease) | ||
2019 (July - December) | $ | 183 | | $ | (110) |
2020 | | 664 | | | (216) |
2021 | | 152 | | | (216) |
2022 | | 51 | | | (216) |
2023 | | 24 | | | (216) |
Thereafter | | 6 | | | (604) |
Total | $ | 1,080 | | $ | (1,578) |
Net amortization of all other identified intangible assets and liabilities was $3.3 million and $4.3 million for the three months ended June 30, 2019 and 2018, respectively. Net amortization of all other identified intangible assets and liabilities was $6.4 million and $8.3 million for the six months ended June 30, 2019 and 2018, respectively. The estimated net amortization of all other identified intangible assets and liabilities for each of the five succeeding fiscal years ending December 31 is as follows (unaudited and in thousands):
| | | | | |
2019 (July - December) | | | | $ | 6,648 |
2020 | | | | | 12,091 |
2021 | | | | | 10,587 |
2022 | | | | | 10,074 |
2023 | | | | | 10,070 |
Thereafter | | | | | 28,520 |
Total | | | | $ | 77,990 |
30
5. Real Estate Assets and Construction in Progress
The following is a summary of our cost of owned andor leased properties as of June 30, 20192020 and December 31, 20182019 (in thousands):
As of June 30, 20192020 (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | |
|
| | |
| Buildings, |
| | |
| | |
| | |
| Buildings, |
| | |
| | | ||
| | | | | Improvements | | Construction | | | | | | | | Improvements | | Construction | | | | ||||
Property Location | | Land | | and Equipment | | in Progress | | Total Cost | | Land | | and Equipment | | in Progress | | Total Cost | ||||||||
Atlanta, Georgia (Atlanta-Metro) | | $ | 20,416 | | $ | 498,603 | | $ | 129,605 | | $ | 648,624 | ||||||||||||
Atlanta, Georgia Campus (1) | | $ | 44,588 | | $ | 563,509 | | $ | 235,947 | | $ | 844,044 | ||||||||||||
Irving, Texas | | | 8,606 | | | 347,082 | | | 108,093 | | | 463,781 | | | 8,606 | | | 372,151 | | | 110,589 | | | 491,346 |
Ashburn, Virginia | | | 16,476 | | | 307,744 | | | 114,152 | | | 438,372 | ||||||||||||
Richmond, Virginia | | | 2,180 | | | 254,396 | | | 69,531 | | | 326,107 | | | 2,180 | | | 197,334 | | | 143,850 | | | 343,364 |
Chicago, Illinois | | | 9,400 | | | 153,540 | | | 129,380 | | | 292,320 | | | 9,400 | | | 235,304 | | | 82,570 | | | 327,274 |
Suwanee, Georgia (Atlanta-Suwanee) | | | 3,521 | | | 170,328 | | | 1,834 | | | 175,683 | | | 3,521 | | | 176,161 | | | 3,117 | | | 182,799 |
Ashburn, Virginia (1) | | | 17,326 | | | 99,987 | | | 168,573 | | | 285,886 | ||||||||||||
Piscataway, New Jersey | | | 7,466 | | | 98,665 | | | 36,146 | | | 142,277 | | | 7,466 | | | 113,795 | | | 33,035 | | | 154,296 |
Santa Clara, California (2) | | | — | | | 105,722 | | | 3,693 | | | 109,415 | | | — | | | 116,638 | | | 447 | | | 117,085 |
Fort Worth, Texas | | | 9,079 | | | 100,200 | | | 15,370 | | | 124,649 | ||||||||||||
Hillsboro, Oregon | | | 18,414 | | | 21,088 | | | 78,810 | | | 118,312 | ||||||||||||
Leased Facilities | | | — | | | 84,550 | | | 2,110 | | | 86,660 | ||||||||||||
Sacramento, California | | | 1,481 | | | 65,595 | | | 268 | | | 67,344 | ||||||||||||
Dulles, Virginia | | | 3,154 | | | 73,220 | | | 4,160 | | | 80,534 | | | 3,154 | | | 51,913 | | | 4,852 | | | 59,919 |
Sacramento, California | | | 1,481 | | | 64,928 | | | 90 | | | 66,499 | ||||||||||||
Leased Facilities | | | — | | | 97,434 | | | 1,522 | | | 98,956 | ||||||||||||
Fort Worth, Texas | | | 9,079 | | | 44,458 | | | 30,036 | | | 83,573 | ||||||||||||
Manassas, Virginia (3) | | | — | | | 18 | | | 58,990 | | | 59,008 | ||||||||||||
Princeton, New Jersey | | | 20,700 | | | 34,292 | | | 423 | | | 55,415 | | | 20,701 | | | 35,225 | | | 76 | | | 56,002 |
Eemshaven, Netherlands | | | — | | | — | | | 55,084 | | | 55,084 | ||||||||||||
Phoenix, Arizona (3) | | | — | | | — | | | 32,927 | | | 32,927 | ||||||||||||
Groningen, Netherlands | | | 1,766 | | | 8,745 | | | 2,634 | | | 13,145 | | | 1,744 | | | 9,858 | | | 3,266 | | | 14,868 |
Eemshaven, Netherlands | | | — | | | — | | | 29,292 | | | 29,292 | ||||||||||||
Phoenix, Arizona (1) | | | — | | | 73 | | | 30,279 | | | 30,352 | ||||||||||||
Hillsboro, Oregon (1) | | | — | | | 55 | | | 52,642 | | | 52,697 | ||||||||||||
Manassas, Virginia (1) | | | — | | | 0 | | | 58,026 | | | 58,026 | ||||||||||||
Other | | | 2,212 | | | 35,846 | | | 46 | | | 38,104 | | | 2,213 | | | 36,296 | | | 797 | | | 39,306 |
| | $ | 107,307 | | $ | 2,087,374 | | $ | 856,005 | | $ | 3,050,686 | | $ | 149,023 | | $ | 2,487,379 | | $ | 976,257 | | $ | 3,612,659 |
(1) | The “Atlanta, Georgia Campus” includes both the existing data center Atlanta (DC-1) as well as new property development associated with construction of a second megascale data center Atlanta (DC-2) on land adjacent to the existing Atlanta DC-1 facility. |
(2) | Owned facility subject to long-term ground sublease. |
(3) | Represent land purchases. Land acquisition costs, as well as subsequent development costs, are included within construction in progress until development on the land has ended and the asset is ready for its intended use. |
31
As of December 31, 2018:
| | | | | | | | | | | | |
|
| | |
| Buildings, |
| | |
| | | |
| | | | | Improvements | | Construction | | | | ||
Property Location | | Land | | and Equipment | | in Progress | | Total Cost | ||||
Atlanta, Georgia (Atlanta-Metro) | | $ | 20,416 | | $ | 493,446 | | $ | 88,253 | | $ | 602,115 |
Irving, Texas | | | 8,606 | | | 345,615 | | | 99,445 | | | 453,666 |
Richmond, Virginia | | | 2,180 | | | 253,098 | | | 67,932 | | | 323,210 |
Chicago, Illinois | | | 9,400 | | | 130,150 | | | 133,095 | | | 272,645 |
Ashburn, Virginia (1) | | | 17,325 | | | 63,245 | | | 184,951 | | | 265,521 |
Suwanee, Georgia (Atlanta-Suwanee) | | | 3,521 | | | 166,298 | | | 3,188 | | | 173,007 |
Piscataway, New Jersey | | | 7,466 | | | 97,806 | | | 33,472 | | | 138,744 |
Manassas, Virginia (1) (2) | | | — | | | — | | | 45,194 | | | 45,194 |
Santa Clara, California (3) | | | — | | | 98,548 | | | 7,600 | | | 106,148 |
Dulles, Virginia | | | 3,154 | | | 72,435 | | | 3,852 | | | 79,441 |
Fort Worth, Texas | | | 9,079 | | | 18,623 | | | 43,715 | | | 71,417 |
Sacramento, California | | | 1,481 | | | 64,874 | | | 92 | | | 66,447 |
Princeton, New Jersey | | | 20,700 | | | 34,046 | | | 431 | | | 55,177 |
Leased Facilities (4) | | | — | | | 43,347 | | | 9,334 | | | 52,681 |
Hillsboro, Oregon (1) | | | — | | | — | | | 39,835 | | | 39,835 |
Phoenix, Arizona (1) | | | — | | | — | | | 29,562 | | | 29,562 |
Other (5) | | | 2,213 | | | 35,720 | | | 113 | | | 38,046 |
| | $ | 105,541 | | $ | 1,917,251 | | $ | 790,064 | | $ | 2,812,856 |
(4) | Includes |
(5) | Consists of Miami, FL; Lenexa, KS and Overland Park, KS facilities. |
6. Leases
Leases as Lessee
We determine if an arrangement is a lease at inception. If the contract is considered a lease, we evaluate leased property to determine whether the lease should be classified as a finance or operating lease in accordance with U.S. GAAP. We periodically enter into finance leases for certain data center facilities, equipment, and fiber optic transmission cabling. In addition, we lease certain real estate (primarily land or real estate space) under operating lease agreements with such assets included within the “Operating lease right of use assets, net” line item of the consolidated balance sheets and the associated lease liabilities included within the “Operating lease liabilities” line item on the consolidated balance sheets.
ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As our leases as lessee typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We assess multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Many of our lease agreements include options to extend the lease, which we do not include in our expected lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.
We use leasing as a source of financing for certain data center facilities and related equipment. We currently operate one data center facility, along with various equipment and fiber optic transmission cabling, that are subject to finance leases.
3228
As of December 31, 2019:
| | | | | | | | | | | | |
| | | |
| Buildings, |
| | | | | | |
| | | | | Improvements | | Construction | | | | ||
Property Location | | Land | | and Equipment | | in Progress | | Total Cost | ||||
Atlanta, Georgia Campus (1) | | $ | 44,588 | | $ | 525,300 | | $ | 128,930 | | $ | 698,818 |
Irving, Texas | | | 8,606 | | | 369,727 | | | 98,170 | | | 476,503 |
Ashburn, Virginia (2) | | | 16,476 | | | 156,396 | | | 189,375 | | | 362,247 |
Richmond, Virginia | | | 2,180 | | | 195,684 | | | 139,948 | | | 337,812 |
Chicago, Illinois | | | 9,400 | | | 205,026 | | | 86,878 | | | 301,304 |
Suwanee, Georgia (Atlanta-Suwanee) | | | 3,521 | | | 174,124 | | | 5,559 | | | 183,204 |
Piscataway, New Jersey | | | 7,466 | | | 103,553 | | | 36,056 | | | 147,075 |
Santa Clara, California (3) | | | — | | | 114,499 | | | 1,238 | | | 115,737 |
Fort Worth, Texas | | | 9,079 | | | 55,018 | | | 35,722 | | | 99,819 |
Leased Facilities (4) | | | — | | | 82,813 | | | 666 | | | 83,479 |
Sacramento, California | | | 1,481 | | | 65,258 | | | 163 | | | 66,902 |
Hillsboro, Oregon (2) | | | — | | | — | | | 63,573 | | | 63,573 |
Manassas, Virginia (2) | | | — | | | — | | | 57,662 | | | 57,662 |
Princeton, New Jersey | | | 20,700 | | | 35,192 | | | 39 | | | 55,931 |
Dulles, Virginia | | | 3,154 | | | 48,651 | | | 4,688 | | | 56,493 |
Eemshaven, Netherlands | | | — | | | — | | | 37,267 | | | 37,267 |
Phoenix, Arizona (2) | | | — | | | 2,412 | | | 31,840 | | | 34,252 |
Groningen, Netherlands | | | 1,741 | | | 9,085 | | | 3,028 | | | 13,854 |
Other (5) | | | 2,213 | | | 36,163 | | | 120 | | | 38,496 |
| | $ | 130,605 | | $ | 2,178,901 | | $ | 920,922 | | $ | 3,230,428 |
(1) | The “Atlanta, Georgia Campus” includes both the existing data center Atlanta (DC-1) as well as new property development associated with construction of a second megascale data center Atlanta (DC-2) on land adjacent to the existing Atlanta DC-1 facility. |
(2) | Represent land purchases. Land acquisition costs, as well as subsequent development costs, are included within construction in progress until development on the land has ended and the asset is ready for its intended use. |
(3) | Owned facility subject to long-term ground sublease. |
(4) | Includes 7 facilities. All facilities are leased, including those subject to finance leases. |
(5) | Consists of Miami, FL; Lenexa, KS and Overland Park, KS facilities. |
4. Leases
Leases as Lessee
We use leasing as a source of financing for certain data center facilities and related equipment. We currently operate 1 data center facility, along with various equipment and fiber optic transmission cabling, that are subject to finance leases. The remaining terms of our finance leases range from one to nineteeneighteen years. Our finance lease associated with the data center includes multiple extension option periods, some of which were included in the lease term as we are reasonably certain to exercise those extension options. Our other finance leases typically do not have options to extend the initial lease term. Finance lease assets are included within the “Buildings, improvements and equipment” line item of the consolidated balance sheets and finance lease liabilities are included within “Finance leases and mortgage notes payable” line item of the consolidated balance sheets.
We currently lease six6 other facilities under operating lease agreements for various data centers, our corporate headquarters and additional office space. Our leases have remaining lease terms ranging from fivefour to sevensix years. We have options to extend the initial lease term on nearly all of these leases. Additionally, we have one1 ground lease for our Santa Clara property that is considered an operating lease which is scheduled to expire in 2052.
Components of lease expense were as follows (unaudited and in thousands):
| | | | | | |
| | Three months ended | | Six months ended | ||
|
| June 30, 2019 |
| June 30, 2019 | ||
Operating lease cost | | $ | 2,543 | | $ | 5,023 |
Finance lease cost: | | | | | | |
Amortization of assets | | | 1,019 | | | 1,405 |
Interest on lease liabilities | | | 454 | | | 699 |
Sublease income | | | (46) | | | (93) |
Total lease costs | | $ | 3,970 | | $ | 7,034 |
Supplemental balance sheet information related to leases was as follows (unaudited and in thousands, except lease term and discount rate):
| | | |
| | June 30, | |
|
| 2019 | |
Operating leases: | | | |
Operating lease right-of-use assets | | $ | 59,946 |
Operating lease liabilities | | | 67,457 |
Finance leases: | | | |
Property and equipment, at cost | | | 48,233 |
Accumulated amortization | | | (2,496) |
Property and equipment, net | | $ | 45,737 |
Finance lease liabilities | | $ | 46,436 |
| | | |
Weighted average remaining lease term (in years): | | | |
Operating leases | | | 13.8 |
Finance leases | | | 11.9 |
| | | |
Weighted average discount rate: | | | |
Operating leases | | | 5.1% |
Finance leases | | | 4.2% |
Supplemental cash flow and other information related to leases was as follows (unaudited and in thousands):
| | | |
| | Six months ended | |
|
| June 30, 2019 | |
Cash paid for amounts included in the measurement of lease liabilities: | | | |
Operating cash flows for operating leases | | $ | 2,540 |
Operating cash flows for finance leases | | $ | 545 |
Financing cash flows for finance leases | | $ | 1,560 |
3329
MaturitiesComponents of lease liabilitiesexpense were as follows (unaudited and in thousands):
| | | | | |
| June 30, 2019 | ||||
| Operating Leases |
| Finance Leases | ||
2019 (July - December) | $ | 4,741 | | $ | 2,310 |
2020 | | 9,589 | | | 4,493 |
2021 | | 9,818 | | | 4,514 |
2022 | | 10,266 | | | 4,639 |
2023 | | 10,393 | | | 4,776 |
Thereafter | | 57,225 | | | 39,908 |
Total Lease Payments | $ | 102,032 | | $ | 60,640 |
Less: Imputed Interest | | 34,574 | | | 14,204 |
Total Lease Obligations | $ | 67,457 | | $ | 46,436 |
| | | | | | | | | | | | |
| | Three months ended June 30, | | Six months ended June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Finance lease cost: | | | | | | | | | | | | |
Amortization of assets | | $ | 1,039 | | $ | 1,019 | | $ | 2,077 | | $ | 1,405 |
Interest on lease liabilities | | | 482 | | | 454 | | | 971 | | | 699 |
Operating lease expense: | | | | | | | | | | | | |
Operating lease cost | | | 2,239 | | | 2,324 | | | 4,502 | | | 4,594 |
Variable lease cost | | | 268 | | | 219 | | | 532 | | | 429 |
Sublease income | | | (47) | | | (46) | | | (95) | | | (93) |
Total lease costs | | $ | 3,981 | | $ | 3,970 | | $ | 7,987 | | $ | 7,034 |
Leases as lessor
Our lease revenue contains both minimum lease payments as well as variable lease payments. See Note 2 – ‘Summary of Significant Accounting Policies’ for further details of our revenue streams and associated accounting treatment. The components of our lease revenue were as follows (in(unaudited and in thousands):
| | | | | | | | | | | | | ||||||||||||
| | Three months ended | | Six months ended | | | | | | | | | | | | | ||||||||
| | June 30, | | June 30, | | June 30, | | Three months ended June 30, | | Six months ended June 30, | ||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Lease revenue: | | | | | | | | | | | | | | | | | | | | | | | | |
Minimum lease revenue | | $ | 101,947 | | $ | 90,411 | | $ | 200,543 | | $ | 178,529 | | $ | 113,147 | | $ | 101,947 | | $ | 220,632 | | $ | 200,543 |
Variable lease revenue (primarily recoveries from customers) | | | 13,030 | | | 10,675 | | | 23,823 | | | 22,485 | | | 12,849 | | | 13,030 | | | 25,445 | | | 23,823 |
Total lease revenue | | $ | 114,977 | | $ | 101,086 | | $ | 224,366 | | $ | 201,014 | | $ | 125,996 | | $ | 114,977 | | $ | 246,077 | | $ | 224,366 |
7.5. Investments in Unconsolidated Entity
During the three months ended March 31, 2019, QTS formed an unconsolidated entity with Alinda Capital Partners (“Alinda”), a premieran infrastructure investment firm. QTS contributed a 118,000 square foot hyperscale data center under development in Manassas, Virginia to the entity. The facility, and the previously executed 10-year operating lease toagreement with a global cloud-based software company, pursuantwas contributed to a 10-year lease agreement, was contributedthe unconsolidated entity in exchange for cash and noncash consideration in the form of equity interest in the entity that was measured at fair value pursuant to Topic 820. The equity interest received and any amounts due from the unconsolidated entity are recorded within our consolidated balance sheetsheets and totaled $32.8$27.8 million as of June 30, 2019.2020. QTS and Alinda each own a 50% interest in the entity. As we are not the primary beneficiary of the arrangement but have the ability to exercise significant influence, we concluded that the investment should be accounted for as an unconsolidated entity using equity method investment accounting. As of June 30, 20192020, the total assets of the entity were $126.1$143.9 million and the total debt outstanding, net of deferred financing costs, was $65.6$84.3 million.
Under the equity method, our cost of investment is adjusted for additional contributions to and distributions from the unconsolidated entity, as well as our share of equity in the earnings and losses of the unconsolidated entity. Generally, distributions of cash flows from operations and capital events are made to members of the unconsolidated entity in accordance with each member’s ownership percentages and the terms of the agreement, but also provides us with rights to preferential cash distributions as certain phases are completed and leased to the underlying tenant. Our policy is to account for distributions from the unconsolidated entity on the basis of the nature of the activities that generated the distribution. Distributions from the operations of the unconsolidated entity are a return on our investment and we classify these distributions as operating cash flows. Any differences between the cost of our investment in an unconsolidated affiliateentity and its underlying equity as reflected in the unconsolidated affiliate’sentity’s financial statements generally result from costs of our investment that are not reflected on the unconsolidated affiliate’sentity’s financial statements.
Under the unconsolidated entity agreement, we will serve as the entity’s operating member, subject to authority and oversight of a board appointed by us and Alinda, and separately we will serve as manager and developer of the facility in exchange for
3430
exchange for management and development fees. The entity 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.
86. Debt
Below is a listing of our outstanding debt, including finance leases, as of June 30, 20192020 and December 31, 20182019 (in thousands):
| | | | | | | | | | | | | | | | | | | ||
| | Weighted Average | | | | | | | | Weighted Average | | | | | | | ||||
| | Coupon Interest Rate at | | Maturities at | | June 30, | | December 31, | | Effective Interest Rate at | | | | June 30, | | December 31, | ||||
|
| June 30, 2019 (1) |
| June 30, 2019 |
| 2019 |
| 2018 |
| June 30, 2020 (1) |
| Maturity Date |
| 2020 |
| 2019 | ||||
| | (unaudited) | | | | (unaudited) | | | | (unaudited) | | | | (unaudited) | | | ||||
Unsecured Credit Facility | | | | | | | | | | | | | | | | | | | ||
Revolving Credit Facility | | 3.40% | | December 17, 2022 | | $ | 255,645 | | $ | 252,000 | | 1.41% | | December 17, 2023 | | $ | 507,854 | | $ | 317,028 |
Term Loan I | | 3.48% | | December 17, 2023 | | | 350,000 | | 350,000 | |||||||||||
Term Loan II | | 3.51% | | April 27, 2024 | | | 350,000 | | 350,000 | |||||||||||
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 | |||||||||||
Senior Notes | | 4.75% | | November 15, 2025 | | | 400,000 | | 400,000 | | 4.75% | | November 15, 2025 | | | 400,000 | | 400,000 | ||
Lenexa Mortgage | | 4.10% | | May 1, 2022 | | | 1,775 | | 1,801 | | 4.10% | | May 1, 2022 | | | 1,707 | | 1,736 | ||
Finance Leases | | 4.34% | | 2019 - 2038 | | | 46,436 | | | 2,873 | | 4.35% | | 2021 - 2038 | | | 43,865 | | | 45,140 |
| | 3.86% | | | | | 1,403,856 | | 1,356,674 | | 3.12% | | | | | 1,653,426 | | 1,463,904 | ||
Less net debt issuance costs | | | | | | | (10,662) | | | (11,557) | | | | | | | (9,962) | | | (10,839) |
Total outstanding debt, net | | | | | | $ | 1,393,194 | | $ | 1,345,117 | | | | | | $ | 1,643,464 | | $ | 1,453,065 |
(1) | The coupon interest rates associated with Term Loan |
Credit Facilities, Senior Notes and Mortgage Notes Payable
(a) Unsecured Credit Facility – In November 2018, we executed an amendment to ourOctober 2019, the Company amended and restated its unsecured credit facility (the “unsecured credit facility”), which among other things included extendingincreased the total potential borrowings, extended maturity dates, lowered interest rates, and provided for an additional term modifying or eliminating certain covenants and reduced pricing by 20 basis points.loan under the agreement. The unsecured credit facility includes a $350$225 million term loan which matures on December 17, 2023,2024 (the “Term Loan A”), a $350$225 million term loan which matures on April 27, 2024,2025 (the “Term Loan B”), an additional term loan of $250 million, maturing on October 18, 2026 (the “Term Loan C”), and an $820 milliona $1.0 billion revolving credit facility which matures on December 17, 2022, with2023. The revolving portion of the unsecured facility has a one yearone-year extension option. Amounts outstanding under the amended unsecured credit facility bear interest at a variable rate equal to, at our election, LIBOR or a base rate, plus a spread that will vary depending upon our leverage ratio. For revolving credit loans, the spread ranges from 1.35%1.25% to 1.95%1.85% for LIBOR loans and 0.35%0.25% to 0.95%0.85% for base rate loans. For term loans,Term Loan A and Term Loan B, the spread ranges from 1.30%1.20% to 1.90%1.80% for LIBORloans and 0.20% to 0.80% for base rateloans. For Term Loan C, the spread ranges from 1.50% to 1.85% for LIBOR loans and 0.30%0.50% to 0.90%0.85% for base rate loans. The unsecured credit facility also provides for borrowing capacity of up to $200$300 million in various foreign currencies, and a $500 million accordion feature, subject to obtaining additional loan commitments.currencies.
Under the unsecured credit facility, the capacity may be increased from the current capacity of $1.52$1.7 billion to $2.02$2.2 billion subject to certain conditions set forth in the credit agreement, including the consent of the administrative agent and obtaining necessary commitments. We are also required to pay a commitment fee to the lenders assessed on the unused portion of the unsecured revolving credit facility. At our election, we can prepay amounts outstanding under the unsecured credit facility, in whole or in part, without penalty or premium.
OurThe Company’s ability to borrow under the amended unsecured credit facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of June 30, 2019, we were2020, the Company was in compliance with all of ourits covenants.
As of June 30, 2019,2020, we had outstanding $956$1,207.9 million of indebtedness under the unsecured credit facility, consisting of $255.6$507.9 million of outstanding borrowings under the unsecured revolving credit facility and $700.0 million outstanding under the term loans, exclusive of net debt issuance costs of $5.8 million. In connection with the unsecured credit facility, as of June 30, 2019, we had additional letters of credit outstanding aggregating to $4.1 million. As of June 30, 2019, the weighted average interest rate for amounts outstanding under the unsecured credit facility, including the effects of interest rate swaps, was 3.47%.
3531
under the term loans, exclusive of net debt issuance costs of $5.9 million. In connection with the unsecured credit facility, as of June 30, 2020, we had additional letters of credit outstanding aggregating to $3.5 million.
We haveThe Company has also entered into certain interest rate swap agreements. See Note 97 – ‘Derivative Instruments’ for additional details.
(b) Senior Notes – On November 8, 2017, the Operating Partnership and QTS Finance Corporation, a subsidiary of the Operating Partnership initially formed solely for the purpose of facilitating the offering of the 5.875% Senior Notes due 2022 (collectively, the “Issuers”), issued $400 million aggregate principal amount of 4.75%4.750% Senior Notes due November 15, 2025 (the “Senior Notes”) in a private offering. The Senior Notes have an interest rate of 4.750% per annum and were issued at a price equal to 100% of their face value. The net proceeds from the offering were used to fund the redemption of and satisfy and discharge the indenture pursuant to which the Issuers issued, all of their outstanding 5.875% Senior Notes and to repay a portion of the amount outstanding under our unsecured revolving credit facility. As of June 30, 2019,2020, the outstanding net debt issuance costs associated with the Senior Notes were $4.8$4.1 million.
The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Operating Partnership’s existing subsidiaries (other than certain foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS Realty Trust, Inc., the Issuers or any other subsidiary guarantor, other than QTS Finance Corporation, the co-issuer of the Senior Notes. QTS Realty Trust, Inc. does not guarantee the Senior Notes and will not be required to guarantee the Senior Notes except under certain circumstances. The offering was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended, and the Senior Notes were issued pursuant to an indenture, dated as of November 8, 2017, among QTS, the Issuers, the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee.
(c) Lenexa Mortgage – On March 8, 2017, we entered into a $1.9 million mortgage loan secured by our Lenexa facility. This mortgage has a fixed rate of 4.1%, with periodic principal payments due monthly and a balloon payment of $1.6 million in May 2022. As of June 30, 2020, the outstanding balance under the Lenexa mortgage was $1.7 million.
The annual remaining principal payment requirements of the Company’s debt securities as of June 30, 20192020 per the contractual maturities, excluding extension options and excluding operating and finance leases, are as follows (unaudited and in thousands):
| | | | | | |
2019 |
| $ | 33 | |||
2020 | | | 70 | |||
2020 (July - December) |
| $ | 35 | |||
2021 | | | 73 | | | 73 |
2022 | | | 257,244 | | | 1,599 |
2023 | | | 350,000 | | | 507,854 |
2024 | | | 225,000 | |||
Thereafter | | | 750,000 | | | 875,000 |
Total | | $ | 1,357,420 | | $ | 1,609,561 |
As of June 30, 2019,2020, we were in compliance with all of our covenants.
9.7. Derivative Instruments
From time to time, we enter into derivative financial instruments to manage certain cash flow risks.
Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.
Interest Rate Swaps
Our objectives in using interest rate swaps are to reduce variability in interest expense and to manage exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
On April 5, 2017, we entered into forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from January 2, 2018 through December 17, 2021 and April 27, 2022, respectively, at approximately 3.3% assuming the current LIBOR spread of 1.3%.
3632
On December 20, 2018,from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.
As of June 30, 2020, we entered into additional forwardhad interest rate swap agreements in place with an aggregate notional amount of $400$700 million. The forward swap agreements effectively fix the interest rate on $400$700 million of term loan borrowings, $200$225 million of swaps allocated to each term loan, from December 17, 2021Term Loan A, $225 million allocated to Term Loan B and April 27, 2022$250 million allocated to Term Loan C, through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the execution of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, we entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.loans.
We reflect our interest rate swap agreements, which are designated as cash flow hedges, at fair value as either assets or liabilities on the consolidated balance sheets within the “Other assets, net” or “Advance rents, security deposits and other“Derivative liabilities” line items, as applicable. As of June 30, 2020 and December 31, 2019, the fair value of interest rate swaps represented an aggregate $19.2 million liability. As of December 31, 2018, the fair value of interest rate swaps included an asset of $5.3 million as well as a liability of $3.0 million.$58.3 million and $19.9 million, respectively.
The forward interest rate swap agreements are derivatives that currently qualify for hedge accounting whereby we record the effective portion of changes in fair value of the interest rate swaps in accumulated other comprehensive income or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized within net income. The amount reclassified from other comprehensive income as an increase to interest expense on the consolidated statements of operations was $2.7 million and $3.5 million for the three and six months ended June 30, 2020, respectively. The amount reclassified from other comprehensive income as a reduction in interest expense on the consolidated statements of operations was $0.5 million and $1.0 million for the three and six months ended June 30, 2019, respectively. The amount reclassified from other comprehensive income to interest expense on the consolidated statements of operations was $0.1 million and $0.5 million for the three and six months ended June 30, 2018, respectively. There was no0 ineffectiveness recognized for the three and six months ended June 30, 2019,2020, and 2018.2019. During the subsequent twelve months, beginning July 1, 2019,2020, we estimate that $1.6$2.0 million will be reclassified from other comprehensive income as an increase to interest expense.
Interest rate derivatives and their fair values as of June 30, 20192020 and December 31, 20182019 were as follows (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Fixed One Month | | | | | | | | | | | | | | | | Fixed One Month | | | | | | | | | | |
Notional Amount | Notional Amount | | LIBOR rate per | | | | | | Fair Value | Notional Amount | | LIBOR rate per | | | | | | Fair Value | ||||||||||||||
June 30, 2019 |
| December 31, 2018 | | annum | | Effective Date | | Expiration Date | | June 30, 2019 |
| December 31, 2018 | ||||||||||||||||||||
June 30, 2020 | June 30, 2020 |
| December 31, 2019 | | annum | | Effective Date | | Expiration Date | | June 30, 2020 |
| December 31, 2019 | |||||||||||||||||||
$ | 25,000 | | $ | 25,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | $ | (200) | | $ | 331 | 25,000 | | $ | 25,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | $ | (672) | | $ | (209) |
| 100,000 | | | 100,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | | (798) | | | 1,318 | 100,000 | | | 100,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | | (2,689) | | | (837) |
| 75,000 | | | 75,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | | (599) | | | 990 | 75,000 | | | 75,000 | | 1.989% | | January 2, 2018 | | December 17, 2021 | | | (2,017) | | | (627) |
| 50,000 | | | 50,000 | | 2.033% | | January 2, 2018 | | April 27, 2022 | | | (527) | | | 667 | 50,000 | | | 50,000 | | 2.033% | | January 2, 2018 | | April 27, 2022 | | | (1,703) | | | (545) |
| 100,000 | | | 100,000 | | 2.029% | | January 2, 2018 | | April 27, 2022 | | | (1,044) | | | 1,341 | 100,000 | | | 100,000 | | 2.029% | | January 2, 2018 | | April 27, 2022 | | | (3,400) | | | (1,081) |
| 50,000 | | | 50,000 | | 2.033% | | January 2, 2018 | | April 27, 2022 | | | (528) | | | 666 | 50,000 | | | 50,000 | | 2.033% | | January 2, 2018 | | April 27, 2022 | | | (1,704) | | | (545) |
| 100,000 | | | 100,000 | | 2.617% | | January 2, 2020 | | December 17, 2023 | | | (3,930) | | | (782) | 100,000 | | | 100,000 | | 2.617% | | January 2, 2020 | | December 17, 2023 | | | (8,502) | | | (4,007) |
| 100,000 | | | 100,000 | | 2.621% | | January 2, 2020 | | April 27, 2024 | | | (4,213) | | | (818) | 100,000 | | | 100,000 | | 2.621% | | January 2, 2020 | | April 27, 2024 | | | (9,331) | | | (4,324) |
| 200,000 | | | 200,000 | | 2.636% | | December 17, 2021 | | December 17, 2023 | | | (3,754) | | | (722) | 70,000 | | | — | | 0.968% | | March 2, 2020 | | October 18, 2026 | | | (2,818) | | | — |
| 200,000 | | | 200,000 | | 2.642% | | April 27, 2022 | | April 27, 2024 | | | (3,583) | | | (648) | 30,000 | | | — | | 0.973% | | March 2, 2020 | | October 18, 2026 | | | (1,215) | | | — |
$ | 1,000,000 | | $ | 1,000,000 | | | | | | | | $ | (19,176) | | $ | 2,343 | ||||||||||||||||
| 200,000 | | | 200,000 | | 2.636% | | December 17, 2021 | | December 17, 2023 | | | (9,783) | | | (3,939) | ||||||||||||||||
| 200,000 | | | 200,000 | | 2.642% | | April 27, 2022 | | April 27, 2024 | | | (9,653) | | | (3,802) | ||||||||||||||||
| 125,000 | | | — | | 1.014% | | December 17, 2023 | | December 17, 2024 | | | (799) | | | — | ||||||||||||||||
| 100,000 | | | — | | 1.035% | | December 17, 2023 | | December 17, 2024 | | | (658) | | | — | ||||||||||||||||
| 75,000 | | | — | | 1.110% | | December 17, 2023 | | October 18, 2026 | | | (1,187) | | | — | ||||||||||||||||
| 100,000 | | | — | | 1.088% | | April 27, 2024 | | April 27, 2025 | | | (639) | | | — | ||||||||||||||||
| 125,000 | | | — | | 1.082% | | April 27, 2024 | | April 27, 2025 | | | (790) | | | — | ||||||||||||||||
| 75,000 | | | — | | 0.977% | | April 27, 2024 | | October 18, 2026 | | | (730) | | | — | ||||||||||||||||
| | | | | | | | | | | | $ | (58,290) | | $ | (19,916) |
37
Power Purchase Agreements
In March 2019, QTSwe entered into two2 10 year agreements to purchase renewable energy equal to the expected electricity needs of our datacenters in Chicago, Illinois and Piscataway, New Jersey. These arrangements currently qualify for hedge accounting whereby we record the changes in fair value of the instruments in “Accumulated other comprehensive income” or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The amount reclassified
33
from other comprehensive income as an increase to utilities expense on the consolidated statements of operations was $0.4 million and $0.8 million for the three and six months ended June 30, 2020. We currently reflect these agreements, which are designated as cash flow hedges, at fair value as liabilities on the consolidated balance sheets within the “Advance rents, security deposits and other“Derivative liabilities” line items.item.
Power purchase agreement derivatives and their fair values as of June 30, 20192020 and December 31, 20182019 were as follows (unaudited and in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
| |||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
| ||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
108. Commitments and Contingencies
We are subject to various routine legal proceedings and other matters in the ordinary course of business. We currently do not have any litigation that would have a material adverse impact on our financial statements. Additionally, we do not currently have any material contingencies related to the impact of COVID-19 reflected in our financial statements aside from certain increases to our general bad debt reserve provided for under ASC 450-20.
11.9. Partners’ Capital, Equity and Incentive Compensation Plans
QualityTech, LP
QTS has the full power and authority to do all the things necessary to conduct the business of the Operating Partnership.
As of June 30, 2019,2020, the Operating Partnership had four4 classes of limited partnership units outstanding: Series A Preferred Stock Units, Series B Convertible Preferred Stock Units, Class A units of limited partnership interest (“Class A units”) and Class O LTIP units of limited partnership units (“Class O units”). The Class A units currently outstanding are now redeemable on a one-for-one1-for-one exchange rate at any time for cash or shares of Class A common stock of QTS. The Company may in its sole discretion elect to assume and satisfy the redemption amount with cash or its shares. Class O units were issued upon grants made under the QualityTech, LP 2010 Equity Incentive Plan (the “2010 Equity Incentive Plan”). Class O units are pari passu with Class A units. Each Class O unit is convertible into Class A units by the Operating Partnership at any time or by the holder at any time following full vesting (if such unit is subject to vesting) based on formulas contained in the partnership agreement.
QTS Realty Trust, Inc.
In connection with its IPO,initial public offering on October 13, 2013 (“IPO”), QTS issued Class A common stock and Class B common stock. Class B common stock entitles the holder to 50 votes per share and was issued to enable our Chief Executive Officer to exchange 2% of his Operating Partnership units so he may have a vote proportionate to his economic interest in the Company. Also in connection with its IPO, QTS adopted the QTS Realty Trust, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”), which authorized 1.75 million shares of Class A common stock to be issued under the 2013 Equity Incentive Plan, including options to purchase Class A common stock if exercised. On May 4, 2015, following approval by our stockholders at our 2015 Annual Meeting of Stockholders, the total number of shares available for issuance under the 2013 Equity Incentive Plan was increased by an additional 3,000,000. On May 9, 2019, following approval by our stockholders at our 2019 Annual Meeting of Stockholders, the total number of shares available for issuance under the 2013 Equity Incentive Plan was increased by an additional 1,110,000.1,110,000 to 5,860,000.
3834
In March 2019, the Compensation Committee completed a redesign of the long-term incentive program for executive officers withto include the following changes:types of awards:
c. | Restricted Stock Awards — the restricted stock awards vest as to one-third of the shares subject to awards on the first anniversary of the date of grant and as to 8.375% of the shares subject to the awards each quarter-end thereafter, subject to the named executive officer’s continued service as an employee as of each vesting date. |
The following is a summary of award activity under the 2010 Equity Incentive Plan and 2013 Equity Incentive Plan and related information for the six months ended June 30, 20192020 (unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | 2010 Equity Incentive Plan | | 2013 Equity Incentive Plan | | 2010 Equity Incentive Plan | | 2013 Equity Incentive Plan | ||||||||||||||||||||||||||||||||||||||||||||||||||||||
|
| |
| |
| Weighted |
| |
| |
| Weighted |
| Restricted |
| |
| |
| | |
| |
| | |
| |
| |
| Weighted |
| |
| |
| Weighted |
| Restricted |
| Weighted |
| |
| Weighted |
| |
| Weighted | ||||||||||||
| | | | Weighted | | average | | | | Weighted | | average | | Stock / | | Weighted | | | | Weighted | | | | Weighted | | | | Weighted | | average | | | | Weighted | | average | | Stock / | | average | | | | average | | | | average | ||||||||||||||
| | Number of | | average | | fair | | | | average | | fair | | Deferred | | average | | | | average | | | | average | | Number of | | average | | fair | | | | average | | fair | | Deferred | | fair value | | | | fair value | | | | fair value | ||||||||||||||
| | Class O units | | exercise price | | value | | Options | | exercise price | | value | | Stock | | grant price | | TSR Units | | grant price | | FFO Units | | grant price | | Class O units | | exercise price | | value | | Options | | exercise price | | value | | Stock | | at grant date | | TSR Units | | at grant date | | FFO Units | | at grant date | ||||||||||||||
Outstanding at December 31, 2018 | | 102,279 | | $ | 24.05 | | $ | 5.67 | | 2,037,163 | | $ | 36.86 | | $ | 7.10 | | 420,309 | | $ | 37.83 | | — | | $ | — | | — | | $ | — | |||||||||||||||||||||||||||||||
Outstanding at December 31, 2019 | | 82,310 | | $ | 25.00 | | $ | 5.97 | | 1,934,838 | | $ | 37.11 | | $ | 7.05 | | 389,750 | | $ | 39.67 | | 84,350 | | $ | 54.64 | | 84,350 | | $ | 42.01 | |||||||||||||||||||||||||||||||
Granted | | — | | | — | | | — | | 135,594 | | | 42.27 | | | 7.62 | | 267,903 | | | 42.05 | | 86,089 | | | 54.64 | | 86,089 | | | 42.01 | | — | | | — | | | — | | 99,872 | | | 56.84 | | | 9.35 | | 263,041 | | | 56.85 | | 84,202 | | | 79.18 | | 84,202 | | | 56.84 |
Exercised/Vested (1) | | (8,375) | | | 20.60 | | | 5.11 | | (112,027) | | | 29.96 | | | 6.07 | | (196,842) | | | 37.96 | | — | | | — | | — | | | — | | (1,875) | | | 25.00 | | | 10.26 | | (27,797) | | | 31.72 | | | 5.89 | | (177,809) | | | 40.50 | | — | | | — | | — | | | — |
Cancelled/Expired | | — | | | — | | | — | | (103,690) | | | 45.87 | | | 9.38 | | (18,622) | (2) | | 42.95 | | (1,739) | | | 54.64 | | (1,739) | | | 42.01 | | — | | | — | | | — | | — | | | — | | | — | | (4,074) | | | 47.65 | | — | | | — | | — | | | — |
Outstanding at June 30, 2019 | | 93,904 | | $ | 24.36 | | $ | 5.72 | | 1,957,040 | | $ | 37.15 | | $ | 7.07 | | 472,748 | | $ | 39.96 | | 84,350 | | $ | 54.64 | | 84,350 | | $ | 42.01 | |||||||||||||||||||||||||||||||
Outstanding at June 30, 2020 | | 80,435 | | $ | 25.00 | | $ | 5.87 | | 2,006,913 | | $ | 38.17 | | $ | 7.18 | | 470,908 | | $ | 48.88 | | 168,552 | | $ | 66.90 | | 168,552 | | $ | 49.42 |
(1) | This represents (i) Class O units which were converted to Class A units, (ii) options to purchase Class A common stock which were exercised, and (iii) the Class A common stock that has been released from restriction and which was not surrendered by the holder to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common stock, with respect to the applicable column. |
The assumptions and fair values for restricted stock and options to purchase shares of Class A common stock granted for the six months ended June 30, 20192020 are included in the following table on a per unit basis (unaudited). Options to purchase shares of Class A common stock were valued using the Black-Scholes model and TSR Units were valued using a Monte-Carlo simulation that leveraged similar assumptions to those used to value the Class A common stock and FFO Units.
| | |
|
| Six Months Ended June 30, |
Fair value of FFO units and restricted stock granted | | $ |
Fair value of TSR units granted | | $ |
Fair value of options granted | | $ |
Expected term (years) | | 5.5 |
Expected volatility | |
|
Expected dividend yield | |
|
Expected risk-free interest rates | |
|
3935
The following tables summarize information about awards outstanding as of June 30, 20192020 (unaudited).
|
|
|
|
|
|
|
|
|
|
| |||||
|
|
|
| ||||
|
|
|
|
|
|
| |
|
|
|
|
|
|
| |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
| | | | | | | |
| | Operating Partnership Awards Outstanding | |||||
|
| |
| |
| Weighted average | |
| | | | Awards | | remaining | |
| | Exercise prices | | outstanding | | vesting period (years) | |
Class O Units | | $ | 25.00 | | 80,435 | | — |
Total Operating Partnership awards outstanding | | | | | 80,435 | | |
| | | | | | | | | | | | | | |
| | QTS Realty Trust, Inc. Awards Outstanding | | QTS Realty Trust, Inc. Awards Outstanding | ||||||||||
|
| |
| |
| Weighted average |
| |
| |
| Weighted average | ||
| | | | Awards | | remaining | | | | Awards | | remaining | ||
| | Exercise prices | | outstanding | | vesting period (years) | | Exercise prices | | outstanding | | vesting period (years) | ||
Restricted stock | | $ | — | | 472,748 | | 1.8 | | $ | — | | 470,908 | | 0.9 |
TSR units | | | — | | 84,350 | | 2.8 | | | — | | 168,552 | | 1.0 |
FFO units | | | — | | 84,350 | | 2.8 | | | — | | 168,552 | | 0.7 |
Options to purchase Class A common stock | | $ | 21.00 - 50.66 | | 1,957,040 | | 0.3 | | $ | 21.00 - 56.84 | | 2,006,913 | | 0.3 |
Total QTS Realty Trust, Inc. awards outstanding | | | | | 2,598,488 | | | | | | | 2,814,925 | | |
Any remaining nonvested awards areoutstanding as of the end of the period have been valued as of the grant date and generally vest ratably over a defined service period. As of June 30, 20192020 all restricted Class A common stock, TSR units, and FFO units outstanding were unvested and approximately 0.70.1 million options to purchase Class A common stock were outstanding wereand unvested. As of June 30, 20192020 we had $25.7$36.1 million of unrecognized equity-based compensation expense which will be recognized over a remaining weighted-average vesting period of 1.30.8 years. The total intrinsic value of Class O units and options to purchase Class A common stock outstanding at June 30, 20192020 was $21.5$55.2 million.
Dividends and Distributions
The following tables present quarterly cash dividends and distributions paid to QTS’ common and preferred stockholders and the Operating Partnership’s unit holders for the six months ended June 30, 20192020 and 20182019 (unaudited):
| | | | | | | | |
Six Months Ended June 30, 2019 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
March 20, 2019 | | April 4, 2019 | | $ | 0.44 | | $ | 27.3 |
December 21, 2018 | | January 8, 2019 | | $ | 0.41 | | $ | 23.7 |
| | | | | | | $ | 51.0 |
| | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 0.45 | | $ | 1.9 |
December 31, 2018 | | January 15, 2019 | | $ | 0.45 | | $ | 1.9 |
| | | | | | | $ | 3.8 |
| | | | | | | | |
Series B Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 1.63 | | $ | 5.1 |
December 31, 2018 | | January 15, 2019 | | $ | 1.63 | | $ | 5.1 |
| | | | | | | $ | 10.3 |
| | | | | | | | |
Six Months Ended June 30, 2020 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
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/Units | | | | | | | | |
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/Units | | | | | | | | |
March 31, 2020 | | April 15, 2020 | | $ | 1.63 | | $ | 5.1 |
December 31, 2019 | | January 15, 2020 | | $ | 1.63 | | | 5.1 |
| | | | | | | $ | 10.2 |
4036
| | | | | | | | |
Six Months Ended June 30, 2018 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Common Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
March 22, 2018 | | April 5, 2018 | | $ | 0.41 | | $ | 23.7 |
December 5, 2017 | | January 5, 2018 | | $ | 0.39 | | $ | 22.2 |
| | | | | | | $ | 45.9 |
| | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | |
April 5, 2018 | | April 16, 2018 | | $ | 0.15 | | $ | 0.6 |
| | | | | | | $ | 0.6 |
| | | | | | | | |
Six Months Ended June 30, 2019 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
March 20, 2019 | | April 4, 2019 | | $ | 0.44 | | $ | 27.3 |
December 21, 2018 | | January 8, 2019 | | $ | 0.41 | | | 23.7 |
| | | | | | | $ | 51.0 |
| | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 0.45 | | $ | 1.9 |
December 31, 2018 | | January 15, 2019 | | $ | 0.45 | | | 1.9 |
| | | | | | | $ | 3.8 |
| | | | | | | | |
Series B Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 1.63 | | $ | 5.1 |
December 31, 2018 | | January 15, 2019 | | $ | 1.63 | | | 5.1 |
| | | | | | | $ | 10.3 |
Additionally, subsequent to June 30, 2019, we2020, the Company paid the following dividends:
● | On July |
● | On July 15, |
● | On July 15, |
Equity Issuances
Class A Common Stock
In June 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. The use of forward sales under the Prior ATM Program generally allows the Company 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. We have concluded that the forward sale agreements meet the derivative scope exception for certain contracts involving an entity’s own equity. The initial forward sale price is subject to daily adjustment based on a floating interest rate factor equal to the specified daily rate less a spread, and will decrease by other fixed amounts specified in the forward sale agreement. Until settlement of all of the forward sale agreements, our earnings per share dilution resulting from the agreements, if any, is determined using the two-class method.
In May 2020, we established a new “at-the-market” equity offering program (the “ATM Program”) pursuant to which we may issue, from time to time, up to $400$500 million of our Class A common stock, which may include shares to be issuedsold on a forward basis. We issued no sharesAs under the Prior ATM Program, the use of forward sales under the ATM Program during the three months ended June 30, 2019.
Previously, in March 2017,generally allows the Company established an “at-the-market” equity offering program (the “prior ATM Program”) pursuant to whichlock in a price on the Company could issue, from time to time, up to $300 millionsale of its Class A common stock. The Company issued no shares under the prior ATM Program during the three months ended June 30, 2019. The Company terminated the prior ATM program in March 2019 in connection with the expiration of its prior universal shelf registration statement.
In February 2019, QTS conducted an underwritten offering of 7,762,500 shares of itsour Class A common stock consisting of 4,000,000 shares issuedwhen sold by the Company duringforward sellers, but
37
defer receiving the first quarternet proceeds from such sales until the shares of 2019 and 3,762,500 shares which will beour Class A common stock are issued at settlement on a forward basis, in each case at a price of $41.50 per share. We received net proceeds of approximately $159 million from the issuance of 4,000,000 shares during the first quarter, which we used to repay amounts outstanding under our unsecured revolving credit facility. We expect to physically settle the forward sale (by the delivery of shares of common stock) and receive proceeds of approximately $147 million from the sale of the 3,762,500 shares of common stock, which we expect to occur by March 1, 2020, although we have the right to elect settlement prior to that time. As of June 30, 2019, we had not settled any shares from the forward sale.later date. We have concluded that the forward sale agreements meet the derivative scope exception for certain contracts involving an entity’s own equity. We have not yet received any proceeds from the forward contract and no amounts have been or will be recorded in equity on our balance sheet until the forward sale agreements settle. The initial forward sale price is subject to daily adjustment based on a floating interest rate factor equal to the specified daily rate less a spread, and will decrease by other fixed amounts specified in the forward sale agreement. Until settlement of the
41
the forward sale agreements, our EPSearnings per share dilution resulting from the agreements, if any, is determined using the two-class method.
At any time during the term of any forward sale under the Prior ATM Program or the ATM Program, we may settle the forward sale by physical delivery of shares of Class A common stock to the forward purchasers or, at our election, cash settle or net share settle. The initial forward sale price per share under each forward sale equals the product of (x) an amount equal to 100% minus the applicable forward selling commission and (y) the volume weighted average price per share at which the borrowed shares of our common stock were sold pursuant to the equity distribution agreement by the relevant forward seller during the applicable forward hedge selling period for such shares to hedge the relevant forward purchaser’s exposure under such forward sale. Thereafter, the forward sale price is subject to adjustment on a daily basis based on a floating interest rate factor equal to the specified daily rate less a spread, and is decreased based on specified amounts related to dividends on shares of our common stock during the term of the applicable forward sale. If the specified daily rate is less than the spread on any day, the interest rate factor will result in a daily reduction of the applicable forward sale price.
During the six months ended June 30, 2020, we received $134.5 million of net proceeds from the settlement of forward shares as noted in the table below. The Company expects to physically settle (by delivering shares of Class A common stock) the remaining forward sales under the Prior ATM Program and ATM Program prior to the first anniversary date of each respective transaction. In addition, during the six months ended June 30, 2020, the Company utilized the forward provisions under the Prior ATM Program and the ATM Program to allow for the sale of additional shares of its common stock as noted in the table below.
In June 2020, QTS conducted an underwritten offering of 4,400,000 shares of common stock offered on a forward basis at a price of $64.90 per share representing available net proceeds upon physical settlement of approximately $271.9 million as of June 30, 2020. The Company expects to physically settle the forward sale agreements (by the delivery of shares of common stock) and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock by June 30, 2021, although the Company has the right to elect settlement prior to that time. We have concluded that the forward sale agreements meet the derivative scope exception for certain contracts involving an entity’s own equity. The initial forward sale price is subject to daily adjustment based on a floating interest rate factor equal to the specified daily rate less a spread, and will decrease by other fixed amounts specified in the forward sale agreement. Until settlement of all of the forward sale agreements, our earnings per share dilution resulting from the agreements, if any, is determined using the two-class method.
The following table represents a summary of equity issuances of our Class A common stock for the six months ended June 30, 2020 (in thousands):
| | | | | | |
Offering Program |
| Forward | | | | Net Proceeds Available/(Received) (1) |
Shares and net proceeds available as of December 31, 2019 | | 3,795 | | | $ | 177,845 |
February 2019 Offering - Settlement | | (931) | (2) | | | (35,841) |
June 2019 Prior ATM Program - Settlements | | (1,000) | (2) | | | (47,490) |
June 2019 Prior ATM Program - Sales | | 3,917 | | | | 209,934 |
Shares and net proceeds available as of March 31, 2020 | | 5,781 | | | $ | 304,448 |
June 2019 Prior ATM Program - Sales | | 634 | | | | 33,643 |
June 2019 Prior ATM Program - Settlements | | (1,033) | (2) | | | (51,162) |
May 2020 ATM Program - Sales | | 517 | | | | 31,690 |
June 2020 Offering - Sales | | 4,400 | | | | 271,938 |
Shares and net proceeds available as of June 30, 2020 | | 10,299 | | | $ | 590,557 |
(1) | Net Proceeds Available remain subject to certain adjustments until settled. |
(2) | Represents the number of forward shares we elected to physically settle during the six months ended June 30, 2020. |
38
Preferred Stock
On March 15, 2018, QTS issued 4,280,000 shares of 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) with a liquidation preference of $25.00 per share, which included 280,000 shares of the underwriters’ partial exercise of their option to purchase additional shares. The Company used the net proceeds of approximately $103.2 million to repay amounts outstanding under its unsecured revolving credit facility. In connection with the issuance of the Series A Preferred Stock, on March 15, 2018 the Operating Partnership issued to the Company 4,280,000 Series A Preferred Units, which have economic terms that are substantially similar to the Company’s Series A Preferred Stock. The Series A Preferred Units were issued in exchange for the Company’s contribution of the net offering proceeds of the offering of the Series A Preferred Stock to the Operating Partnership.
Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the 15th day of each January, April, July and October. The first dividend on the Series A Preferred Stock was paid on April 16, 2018, in the amount of $0.14844 per share for the period March 15, 2018 through April 14, 2018. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A Preferred Stock will rank senior to common stock and pari passu with the Series B Preferred Stock with respect to the payment of distributions and other amounts. Except in instances relating to preservation of QTS’sQTS’ qualification as a REIT or pursuant to the Company’s special optional redemption right, the Series A Preferred Stock is not redeemable prior to March 15, 2023. On and after March 15, 2023, the Company may, at its option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.
Upon the occurrence of a change of control, the Company has a special optional redemption right that enables it to redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, within 120 days after the first date on which a change of control has occurred resulting in neither QTS nor the surviving entity having a class of common shares listed on the NYSE, NYSE Amex, or NASDAQ or the acquisition of beneficial ownership of its stock entitling a person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in election of directors. The special optional redemption price is $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.
Upon the occurrence of a change of control, holders will have the right (unless the Company has elected to exercise its special optional redemption right to redeem their Series A Preferred Stock) to convert some or all of such holder’s Series A Preferred Stock into a number of shares of Class A common stock, par value $0.01 per share, equal to the lesser of:
● | the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends (whether or not declared) to, but not including, the change of control conversion date (unless the change of control conversion date is after a record date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this sum) by (ii) the Common Stock Price; and |
● | 1.46929 (i.e., the Share Cap); |
subject, in each case, to certain adjustments and provisions for the receipt of alternative consideration of equivalent value as described in the prospectus supplement for the Series A Preferred Stock.
On June 25, 2018, QTS issued 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) with a liquidation preference of $100.00 per share, which included 412,500 shares the underwriters purchased pursuant to the exercise of their overallotment option in full. The Company used the net proceeds of approximately $304 million to repay amounts outstanding under its unsecured revolving credit facility. In connection with the issuance of the Series B Preferred Stock, on June 25, 2018 the Operating Partnership issued to the Company 3,162,500 Series B Preferred Units, which have economic terms that are substantially similar to the Company’s Series B
42
Preferred Stock. The Series B Preferred Units were issued in exchange for the Company’s contribution of the net offering proceeds of the offering of the Series B Preferred Stock to the Operating Partnership.
Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about the 15th day of each January, April, July and October. The first dividend on the Series B Preferred Stock was paid on October 15, 2018, in the amount of $1.9861111 per share for the period June 25, 2018 through October 14, 2018. The Series B Preferred Stock is convertible by holders into shares of Class A common stock at
39
any time at the then-prevailing conversion rate. The conversion rate as of June 30, 20192020 is 2.12792.1362 shares of the Company’s Class A common stock per share of Series B Preferred Stock. The Series B Preferred Stock does not have a stated maturity date. Upon liquidation, dissolution or winding up, the Series B Preferred Stock will rank senior to common stock and pari passu with the Series A Preferred Stock with respect to the payment of distributions and other amounts. The Series B Preferred Stock willis not be redeemable by the Company. At any time on or after July 20, 2023, the Company may at its option cause all (but not less than all) outstanding shares of the Series B Preferred Stock to be automatically converted into the Company’s Class A common stock at the then-prevailing conversion rate if the closing sale price of the Company’s Class A common stock is equal to or exceeds 150% of the then-prevailing conversion price for at least 20 trading days in a period of 30 consecutive trading days, including the last trading day of such 30-day period, ending on the trading day prior to the issuance of a press release announcing the mandatory conversion.
If a holder converts its shares of Series B Preferred Stock at any time beginning at the opening of business on the trading day immediately following the effective date of a fundamental change (as described in the prospectus supplement) and ending at the close of business on the 30th trading day immediately following such effective date, the holder will automatically receive a number of shares of the Company’s Class A common stock equal to the greater of:
● | the sum of (i) a number of shares of the Company’s Class A common stock, as may be adjusted, as described in the Articles Supplementary for the 6.50% Series B Cumulative Convertible Perpetual Preferred Stock filed with the State Department of Assessments and Taxation of Maryland on June 22, 2018 (the “Articles Supplementary”) and (ii) the make-whole premium described in the Articles Supplementary; and |
● | a number of shares of the Company’s Class A common stock equal to the lesser of (i) the liquidation preference divided by the average of the daily volume weighted average prices of the Company’s Class A common stock for ten days preceding the effective date of a fundamental change and (ii) 5.1020 (subject to adjustment). |
QTS Realty Trust, Inc. Employee Stock Purchase Plan
In June 2015, we established the QTS Realty Trust, Inc. Employee Stock Purchase Plan (the “2015 Plan”) to give eligible employees the opportunity to purchase, through payroll deductions, shares of our Class A common stock in the open market by an independent broker with the Company paying brokerage commissions and fees associated with such share purchases. The 2015 Plan became effective July 1, 2015. We reserved 250,000 shares of our Class A common stock for purchase under the 2015 Plan, which were registered pursuant to a registration statement on Form S-8 filed on June 17, 2015.
On May 4, 2017, our stockholders approved the 2017 Amended and Restated QTS Realty Trust, Inc. Employee Stock Purchase Plan (the “2017 Plan”). The 2017 Plan became effective July 1, 2017 and is administered by the compensation committee (the “Compensation Committee”) of the board of directors (or by a committee of one or more persons appointed by it or the board of directors). The 2017 Plan permits participants to purchase our Class A common stock at a discount of up to 10% (as determined by the Compensation Committee). Employees of our Company and our majority-owned subsidiaries who have been employed for at least thirty days and who perform at least thirty hours of service per week for our Company are eligible to participate in the 2017 Plan, excluding any employee who, at any time during which the payroll deductions are made on behalf of the participating employees to purchase stocks, owns shares representing five percent or more of the total combined voting power or value of all classes of shares of our Company, or who is a Section 16 officer. Under the 2017 Plan, there are four purchase periods per year, and participants may deduct a minimum of $20 per paycheck and a maximum of $1,000 per paycheck towards the purchase of shares. Shares purchased under the 2017 Plan are subject to a one-year holding period following the purchase date, during which they may not be sold or transferred. We reserved 239,989 shares of our Class A common stock, subject to certain adjustments, for
43
purchase under the 2017 Plan, which were registered pursuant to a registration statement on Form S-8 originally filed on June 17, 2015 and amended on June 30, 2017.
12.10. Related Party Transactions
WeAs described further in Note 5 – ‘Investments in Unconsolidated Entity’, during the six months ended June 30, 2019, QTS formed an unconsolidated entity with Alinda, an infrastructure investment firm. QTS contributed a hyperscale data center under development in Manassas, Virginia to the entity. The facility, and the previously executed operating lease to a global cloud-based software company pursuant to a 10-year lease agreement, was contributed in exchange for cash and noncash consideration in the form of equity interest in the entity that was measured at fair value pursuant to ASC Topic 820. QTS and Alinda each own a 50% interest in the entity.
Under the unconsolidated entity agreement, we serve as the entity’s operating member, subject to authority and oversight of a board appointed by us and Alinda, and separately we serve as manager and developer of the facility in exchange for management and development fees. QTS earned $0.4 million and $0.2 million in development fees from the unconsolidated entity during the three months ended June 30, 2020 and 2019, respectively, and $0.9 million and $0.4 million for the six months ended June 30, 2020 and 2019, respectively. In addition, QTS earned approximately $0.2 million and $0.2 million in management fees from the unconsolidated entity during the three months ended June 30, 2020 and 2019, respectively, and $0.4 million and $0.2 million for the six months ended June 30, 2020 and 2019, respectively.
In addition, we periodically execute transactions with entities affiliated with our Chairman and Chief Executive Officer. Such transactions include automobile, furniture and equipment purchases as well as building operating lease payments and receipts, and reimbursement for the use of a private aircraft service by our officers and directors.
40
The transactions which occurred during the three and six months ended June 30, 20192020 and 20182019 are outlined below (unaudited and in thousands):
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||
Tax, utility, insurance and other reimbursement | | $ | 78 | | $ | 174 | | $ | 254 | | $ | 435 |
Rent expense | | | 257 | | | 253 | | | 514 | | | 507 |
Capital assets acquired | | | - | | | 370 | | | - | | | 424 |
Total | | $ | 335 | | $ | 797 | | $ | 768 | | $ | 1,366 |
| | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | ||||
Tax, utility, insurance and other reimbursement | | $ | 174 | | $ | 135 | | $ | 435 | | $ | 396 |
Rent expense | | | 253 | | | 253 | | | 507 | | | 507 |
Capital assets acquired | | | 370 | | | 46 | | | 424 | | | 204 |
Total | | $ | 797 | | $ | 434 | | $ | 1,366 | | $ | 1,107 |
13.11. Noncontrolling Interest
Concurrently with the completion of the IPO, QTS consummated a series of transactions pursuant to which QTS became the sole general partner and majority owner of QualityTech, LP, which then became its operating partnership. The previous owners of QualityTech, LP retained 21.2% ownership of the Operating Partnership as of the date of the IPO.
Commencing at any time beginning November 1, 2014, at the election of the holders of the noncontrolling interest, the currently outstanding Class A units of the Operating Partnership are redeemable for cash or, at the election of the Company, Class A common stock of the Company on a one-for-one1-for-one basis. As of June 30, 2019,2020, the noncontrolling ownership interest percentage of QualityTech, LP was 10.7%9.8%.
14.12. Earnings per share of QTS Realty Trust, Inc.
Basic income per share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share adjusts basic income per share for the effects of potentially dilutive common shares. Unvested restricted stock awards and our forward sale contractcontracts described in Note 119 contain non-forfeitable rights to dividends and thus are participating securities and are included in the computation of basic earnings per share pursuant to the two-class method for all periods presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common stockholders. Accordingly, service-based restricted stock awards and the forward sale contractcontracts were included in the calculation of basic earnings per share using the two-class method for all periods presented to the extent outstanding during the period.
4441
The computation of basic and diluted net income per share is as follows (in thousands, except per share data, and unaudited):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Numerator: | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) | ||||||||||||
Loss (income) attributable to noncontrolling interests | | | (52) | | | 1,002 | | | (1,642) | | | 1,031 | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 | ||||||||||||
Income attributable to noncontrolling interests | | | (317) | | | (52) | | | (427) | | | (1,642) | ||||||||||||
Preferred stock dividends | | | (7,045) | | | (2,248) | | | (14,090) | | | (2,576) | | | (7,045) | | | (7,045) | | | (14,090) | | | (14,090) |
Earnings attributable to participating securities | | | (1,880) | | | (227) | | | (3,814) | | | (485) | | | (5,552) | | | (1,880) | | | (7,148) | | | (3,814) |
Net income (loss) available to common stockholders after allocation of participating securities | | $ | (1,442) | | $ | (7,906) | | $ | 9,137 | | $ | (8,715) | ||||||||||||
Net income (loss) available to common stockholders after allocation to participating securities | | $ | (2,705) | | $ | (1,442) | | $ | (3,336) | | $ | 9,137 | ||||||||||||
Denominator: | | | | | | | | | | | | | | | | | | | | | | | | |
Weighted average shares outstanding - basic | | | 54,713 | | | 50,542 | | | 53,338 | | | 50,366 | | | 59,773 | | | 54,713 | | | 58,900 | | | 53,338 |
Effect of Class O units and options to purchase Class A common stock on an "as if" converted basis | | | — | | | — | | | 416 | | | — | ||||||||||||
Effect of Class O units, TSR units and options to purchase Class A common stock on an "as if" converted basis | | | — | | | — | | | — | | | 416 | ||||||||||||
Weighted average shares outstanding - diluted | | | 54,713 | | | 50,542 | | | 53,754 | | | 50,366 | | | 59,773 | | | 54,713 | | | 58,900 | | | 53,754 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Basic net income (loss) per share | | $ | (0.03) | | $ | (0.16) | | $ | 0.17 | | $ | (0.17) | | $ | (0.05) | | $ | (0.03) | | $ | (0.06) | | $ | 0.17 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Diluted net income (loss) per share | | $ | (0.03) | | $ | (0.16) | | $ | 0.17 | | $ | (0.17) | | $ | (0.05) | | $ | (0.03) | | $ | (0.06) | | $ | 0.17 |
* | Note: The calculations of basic and diluted net income (loss) per share above do not include the following number of Class A partnership units, Class O units, TSR units and options to purchase common stock on an “as if” converted basis, and the effects of Series B Convertible preferred stock on an “as if” converted basis, as their respective inclusions would have been antidilutive: |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
| | 2019 |
| 2018 |
| 2019 |
| 2018 | | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Class A Partnership units | | | 6,669 | | | 6,677 | | | 6,671 | | | 6,629 | | | 6,671 | | | 6,669 | | | 6,671 | | | 6,671 |
Class O units, TSR units and options to purchase common stock on an "as if" converted basis | | | 495 | | | 204 | | | — | | | 373 | | | 1,131 | | | 495 | | | 1,066 | | | — |
Series B Convertible preferred stock on an "as if" converted basis | | | 6,729 | | | 443 | | | 6,729 | | | 223 | | | 6,756 | | | 6,729 | | | 6,753 | | | 6,729 |
15.13. Contracts with Customers
Future minimum payments to be received under non-cancelable customer contracts including both lease rental revenue components and nonleasenon-lease revenue components that are accounted for as a combined lease component in accordance with the practical expedient provided by ASC Topic 842 which is discussed in Note 2 above (inclusive of payments for contracts which have not yet commenced, and exclusive of variable lease revenue such as recoveries of operating costs from customers) are as follows for the years ending December 31 (unaudited and in thousands):
| | | | | | |
2019 (July - December) | | $ | 193,260 | |||
2020 | | | 336,466 | |||
2020 (July - December) | | $ | 208,875 | |||
2021 | | | 281,412 | | | 373,119 |
2022 | | | 191,204 | | | 281,624 |
2023 | | | 108,081 | | | 181,517 |
2024 | | | 133,727 | |||
Thereafter | | | 162,421 | | | 285,825 |
Total | | $ | 1,272,844 | | $ | 1,464,687 |
42
16.14. Fair Value of Financial Instruments
ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases
45
where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.
Short-term instruments: The carrying amounts of cash and cash equivalents and restricted cash approximate fair value.
Derivative Contracts:
Interest rate swaps
Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2019,2020, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 20192020 or December 31, 2018.2019.
Power Purchase Agreements
In March 2019, we began using energy hedges to manage risk related to energy prices. The inputs used to value the derivatives primarily fall within Level 2 of the fair value hierarchy, and valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including futures curves. The fair values of the energy hedges are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future energy rates (forward curves) derived from observable market futures curves. To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.
Nonrecurring purchase or sale of assets:Credit facility and Senior Notes: During the six months ended June 30, 2019, we recognized a gain on the sale of real estate assets that is discussed in detail in Note 7. In orderAs market interest rates have fluctuated compared to determine fair value of the noncash equity consideration received for the sale of the assets, we utilized estimation models to derivecontracted interest rates, the fair value of our unsecured credit facility approximated the equity interest received incarrying value of the transaction. These estimation models consistedcredit facility less the fair value of a discounted cash flow analysis that included Level 3 inputs including market rents, discount rates, expected occupancy and estimates of additional capital expenditures, and capitalization rates derived from market data.
the
4643
Credit facility and Senior Notes: Our unsecured credit facility did not have interest rates which were materially different than current market conditions and therefore, the fair value approximated the carrying value.rate swap liability. The fair value of our Senior Notes was estimated using Level 2 “significant other observable inputs,” primarily based on quoted market prices for the same or similar issuances. At June 30, 2019,2020, the fair value of the Senior Notes was approximately $396.0$408.0 million.
Other debt instruments: The fair value of our other debt instruments (including finance leases and mortgage notes payable) were estimated in the same manner as the unsecured credit facility above. Similarly, each of these instruments did not have interest rates which were materially different than current market conditions and therefore, the fair value of each instrument approximated the respective carrying values.
16.15. Subsequent Events
In July 2019,2020, we paid our regular quarterly cash dividends on our common stock, Series A Preferred Stock and Series B Preferred Stock. See the ‘Dividends and Distributions’ section of Note 119 for additional details.
4744
ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations
The following discussion and analysis presents the financial condition and results of operations of QTS Realty Trust, Inc., a Maryland corporation (“QTS”), which includes the operations of QualityTech, LP (the “Operating Partnership”), for the three and six months ended June 30, 20192020 and 2018.2019. You should read the following discussion and analysis in conjunction with QTS’ and the Operating Partnership’s accompanying consolidated financial statements and related notes contained elsewhere in this Form 10-Q. We believe it is important for investors to understand the few differences between the financial statements of QTS and the Operating Partnership. See “Explanatory Note” for an explanation of the differences between these few differences.financial statements in the context of how QTS and the Operating Partnership operate as a consolidated company. Since the financial data presented in this Item 2 does not contain any differences between QTS and the Operating Partnership, all periods presented reflect the operating results of both QTS and the Operating Partnership.
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 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. You also can identify forward-looking statements by discussions of strategy, plans or intentions.
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:
● | 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; |
45
● | 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; |
48
● | 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 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 unconsolidated joint venture investments, such as lack of sole decision-making authority and reliance on our partners’ financial condition. |
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, 20182019, and Item 1A. “Risk Factors” of this Form 10-Q.10-Q, as well as other periodic reports that the Company files 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-locatedstrategically 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 1,1001,200 customers in the financial services, healthcare, retail, government, technology and technologyvarious 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), depending on the needs of ourincluding 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 nearly double our sellable data center raised floor space without constructing or acquiring any new buildings. In addition, we own more than 640721 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, 2019,2020, we operated a portfolio of 2625 data centers located throughout the United States, Canada Europe and Asia.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
46
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.
QTS is a Maryland corporation formed on May 17, 2013 and is the sole general partner and majority owner of the Operating Partnership. Our Class A common stock trades on the New York Stock Exchange under the ticker symbol “QTS.”The COVID-19 Pandemic
We account forcontinue to actively monitor developments with respect to COVID-19 and have taken numerous actions based on corporate policies specifically focusing on the operations of allsafety and wellness of our propertiescustomers, 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 and negative pressure in one reporting segment.
49
June 30, 2020, these developments have not had a known material adverse effect on our business. As of June 30, 2019, QTS owned2020, 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 approximate 89.3% ownership interestessential operation, which has allowed us to remain fully staffed with critical personnel in place to continue to provide service and support for our customers.
We previously reported that since the beginning of the economic disruptions from COVID-19, we had experienced a modest increase in customer requests for extended payment terms, primarily concentrated in the Operating Partnership. Substantially allretail, oil and gas, hospitality and transportation customer verticals, with these customers representing approximately 5% of our assets are heldrevenue for the three months ended March 31, 2020. During the second quarter of 2020, the pace of additional customer requests for extended payment terms moderated while a number of customers who had previously asked for extended payment terms have since resumed payments. Overall, we continue to see cash collections and receivables trending at a level that is closer to historical levels but have considered the additional uncertainty and risk within our portfolio of receivables caused by the COVID-19 pandemic when determining reserve levels and estimating future collections as of June 30, 2020.
In addition, we previously reported that we had experienced modest delays in construction activity in a few of our operations are conductedmarkets primarily as a result of availability of contractors and slower permitting during the three months ended March 31, 2020. During the second quarter and through the Operating Partnership.date of this report, we are pleased to report that our commitments to customers remain on track and we do not currently anticipate any meaningful delays in our development activity associated with our booked-not-billed backlog in 2020 assuming current trends continue.
The Operating Partnership is a Delaware limited partnership formedextent to which COVID-19 impacts our business and operations remains largely uncertain and will depend on August 5, 2009future developments that are highly uncertain and was QTS’ historical predecessor priorcannot be predicted with confidence, including the duration and scope of the pandemic, new information that may emerge concerning the severity of COVID-19, the response of the overall economy and financial markets and the actions taken to QTS’ initial public offeringcontain COVID-19 or treat its impact, such as government actions, laws or orders or any changes or amendments thereto and the success of any lifting or easing of, or the risk of any premature lifting or easing of, any such restrictions, among others. The COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial performance, and results of operations and also may exacerbate many of the risks identified under the section entitled “Risk Factors” in our Annual Report on October 13, 2013 (“IPO”), having operatedForm 10-K for the Company’s business until the IPO.
We believe that QTS has operated and has been organized in conformity with the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2013. Our qualification as2019. For a REIT, and maintenancefurther discussion of such qualification, depends upon our abilitythe risks related to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”) relating to, among other things, the sources of our gross income, the composition and values of our assets, our distributions to our stockholders and the concentration of ownership of our equity shares.COVID-19 pandemic, see “Item 1A Risk Factors.”
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 1,1001,200 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 and the world’s largest global Internet and cloud companies, to major healthcare, telecommunications and software and web-based companies.
47
As a result of our diverse customer base, customer concentration in our portfolio is limited. As of June 30, 2019,2020, only five of our more than 1,1001,200 customers individually accounted for more than 3% of our monthly recurring revenue (“MRR”) (as defined below), with the largest customer accounting for approximately 11.3%10.9% of our MRR and the next largest customer accounting for only 5.9%5.5% of our MRR.
Our Portfolio
As of June 30, 2019,2020, including 100% of the unconsolidated joint venturesentity with which we are affiliated, we operated 2625 data centers located throughout the United States, Canada Europe and Asia,Europe, containing an aggregate of approximately 6.57.2 million gross square feet of space, including approximately 2.93.2 million “basis-of-design” raised floor square feet (approximately 95.8%96.3% of which is wholly owned by us including our data center in Santa Clara which is subject to a long-term ground lease), which represents the total sellable data center raised floor potential of our existing data center facilities. This reflects the maximum amount of space in our existing buildings that could be leased following full build-out, depending on the space and power configuration that we deploy. As of June 30, 2019,2020, this space included approximately 1.61.8 million raised floor operating net rentable square feet, or NRSF, plus approximately 1.31.4 million square feet of additional raised floor in our development pipeline, of which approximately 101,000158,000 raised floor square feet is expected to become operational by December 31, 2019.2020. Of the total 1.31.4 million raised floor square feet in our development pipeline, approximately 61,000118,000 square feet was related to customer leases which had been executed as of June 30, 20192020 but not yet commenced. Our facilities collectively have access to approximately 783956 megawatts (“MW”) of available utility power. Access to power typically is typically the most limiting and expensive component in developing a data center and, as such, we believe our significant access to power represents an important competitive advantage.
5048
The following table presents an overview of the portfolio of operating properties that we own or lease, based on information as of June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | Net Rentable Square Feet (Operating NRSF) (1) | | | | | | | | | | | | | | | | Net Rentable Square Feet (Operating NRSF) (1) | | | | | | | | | | | ||||||||||||||||||
| | | | | | | | | | | | | | | | | | Available | | Basis of | | Current | | | | | | | | | | | | | | | | | | Available | | Basis of | | Current | ||||||
| | | | Gross | | | | | | | | | | | | | | Utility | | Design | | Raised | | | | Gross | | | | | | | | | | | | | | Utility | | Design | | Raised | ||||||
| | Year | | Square | | Raised | | Office & | | Supporting | | | | % | | Annualized | | Power | | ("BOD") | | Floor as a | | Year | | Square | | Raised | | Office & | | Supporting | | | | % | | Annualized | | Power | | ("BOD") | | Floor as a | ||||||
Property | | Acquired (2) | | Feet (3) | | Floor (4) | | Other (5) | | Infrastructure (6) | | Total | | Occupied (7) | | Rent (8) | | (MW) (9) | | NRSF | | % of BOD | | Acquired (2) | | Feet (3) | | Floor (4) | | Other (5) | | Infrastructure (6) | | Total | | Occupied (7) | | Rent (8) | | (MW) (9) | | NRSF | | % of BOD | ||||||
Richmond, VA | | 2010 | | 1,318,353 | | 167,309 | | 51,093 | | 178,854 | | 397,256 | | 61.9 | % | | $ | 36,583,320 | | 110 | | 557,309 | | 30.0 | % | | 2010 | | 1,318,353 | | 117,309 | | 51,093 | | 131,654 | | 300,056 | | 85.4 | % | | $ | 34,155,319 | | 110 | | 557,309 | | 21.0 | % |
Atlanta, GA (Metro) | | 2006 | | 968,695 | | 486,706 | | 36,953 | | 346,263 | | 869,922 | | 96.2 | % | | $ | 106,029,401 | | 72 | | 527,186 | | 92.3 | % | |||||||||||||||||||||||||
Atlanta, GA (DC - 1) (10) | | 2006 | | 968,695 | | 527,186 | | 36,953 | | 364,815 | | 928,954 | | 98.8 | % | | | 121,257,186 | | 72 | | 527,186 | | 100.0 | % | |||||||||||||||||||||||||
Irving, TX | | 2013 | | 698,000 | | 174,160 | | 6,981 | | 179,083 | | 360,224 | | 94.7 | % | | $ | 52,309,657 | | 140 | | 275,701 | | 63.2 | % | | 2013 | | 698,000 | | 187,742 | | 6,981 | | 198,913 | | 393,636 | | 97.6 | % | | | 54,296,750 | | 140 | | 275,701 | | 68.1 | % |
Princeton, NJ | | 2014 | | 553,930 | | 58,157 | | 2,229 | | 111,405 | | 171,791 | | 100.0 | % | | $ | 10,206,631 | | 22 | | 158,157 | | 36.8 | % | | 2014 | | 553,930 | | 58,157 | | 2,229 | | 111,405 | | 171,791 | | 100.0 | % | | | 10,380,831 | | 22 | | 158,157 | | 36.8 | % |
Chicago, IL | | 2014 | | 474,979 | | 56,000 | | 1,786 | | 58,182 | | 115,968 | | 90.2 | % | | $ | 13,948,143 | | 24 | | 215,855 | | 25.9 | % | | 2014 | | 474,979 | | 87,500 | | 3,508 | | 88,422 | | 179,430 | | 88.6 | % | | | 20,718,808 | | 56 | | 215,855 | | 40.5 | % |
Ashburn, VA | | 2017 | | 445,000 | | 19,500 | | 6,096 | | 31,988 | | 57,584 | | 91.0 | % | | $ | 4,921,428 | | 50 | | 178,000 | | 11.0 | % | | 2017 | | 445,000 | | 110,606 | | 13,199 | | 110,560 | | 234,365 | | 94.4 | % | | | 7,602,061 | | 50 | | 178,000 | | 62.1 | % |
Suwanee, GA | | 2005 | | 369,822 | | 205,608 | | 8,697 | | 107,128 | | 321,433 | | 91.9 | % | | $ | 57,137,846 | | 36 | | 205,608 | | 100.0 | % | | 2005 | | 369,822 | | 205,608 | | 8,697 | | 107,128 | | 321,433 | | 94.8 | % | | | 62,137,295 | | 36 | | 212,975 | | 96.5 | % |
Piscataway, NJ | | 2016 | | 360,000 | | 98,820 | | 14,311 | | 100,151 | | 213,282 | | 89.8 | % | | $ | 18,374,729 | | 111 | | 176,000 | | 56.1 | % | | 2016 | | 360,000 | | 111,263 | | 19,243 | | 110,479 | | 240,985 | | 94.6 | % | | | 22,259,885 | | 111 | | 176,000 | | 63.2 | % |
Fort Worth, TX | | 2016 | | 261,836 | | 29,960 | | 14,106 | | 54,944 | | 99,010 | | 99.6 | % | | $ | 4,486,348 | | 50 | | 80,000 | | 37.5 | % | | 2016 | | 261,836 | | 55,828 | | 17,232 | | 97,699 | | 170,759 | | 77.0 | % | | | 5,831,804 | | 50 | | 80,000 | | 69.8 | % |
Santa Clara, CA* | | 2007 | | 135,322 | | 59,905 | | 944 | | 45,094 | | 105,943 | | 85.9 | % | | $ | 18,972,887 | | 11 | | 80,940 | | 74.0 | % | |||||||||||||||||||||||||
Hillsboro, OR | | 2017 | | 158,000 | | 16,563 | | 1,000 | | 14,228 | | 31,791 | | 100.0 | % | | | 677,964 | | 30 | | 85,000 | | 19.5 | % | |||||||||||||||||||||||||
Santa Clara, CA (11) | | 2007 | | 135,322 | | 59,905 | | 944 | | 45,094 | | 105,943 | | 90.1 | % | | | 22,854,006 | | 11 | | 80,940 | | 74.0 | % | |||||||||||||||||||||||||
Sacramento, CA | | 2012 | | 92,644 | | 54,595 | | 2,794 | | 23,916 | | 81,305 | | 36.5 | % | | $ | 10,382,712 | | 8 | | 54,595 | | 100.0 | % | | 2012 | | 92,644 | | 54,595 | | 2,794 | | 23,916 | | 81,305 | | 38.2 | % | | | 10,310,436 | | 8 | | 54,595 | | 100.0 | % |
Dulles, VA | | 2017 | | 87,159 | | 30,545 | | 5,997 | | 32,892 | | 69,434 | | 65.4 | % | | $ | 16,937,885 | | 13 | | 48,270 | | 63.3 | % | |||||||||||||||||||||||||
Leased facilities ** | | 2006 & 2015 | | 192,513 | | 63,862 | | 18,650 | | 41,901 | | 124,413 | | 83.4 | % | | $ | 27,108,143 | | 14 | | 84,474 | | 75.6 | % | |||||||||||||||||||||||||
Other *** | | Misc. | | 459,549 | | 51,561 | | 49,337 | | 70,636 | | 171,534 | | 83.6 | % | | $ | 11,843,824 | | 97 | | 180,380 | | 28.6 | % | |||||||||||||||||||||||||
Consolidated properties | | | | 6,417,802 | | 1,556,688 | | 219,974 | | 1,382,437 | | 3,159,099 | | 88.0 | % | | $ | 389,242,954 | | 759 | | 2,822,475 | | 55.2 | % | |||||||||||||||||||||||||
Dulles, VA (12) | | 2017 | | 87,159 | | 30,545 | | 5,997 | | 32,892 | | 69,434 | | 90.3 | % | | | 18,059,373 | | 13 | | 48,270 | | 63.3 | % | |||||||||||||||||||||||||
Leased facilities (13) | | 2006 & 2015 | | 190,875 | | 62,274 | | 18,650 | | 41,901 | | 122,825 | | 84.5 | % | | | 24,533,568 | | 14 | | 82,886 | | 75.1 | % | |||||||||||||||||||||||||
Other (14) | | Misc. | | 459,549 | | 51,561 | | 49,337 | | 70,636 | | 171,534 | | 86.0 | % | | | 13,787,796 | | 98 | | 180,380 | | 28.6 | % | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | 6,574,164 | | 1,736,642 | | 237,857 | | 1,549,742 | | 3,524,241 | | 93.1 | % | | $ | 428,863,082 | | 821 | | 2,913,254 | | 59.6 | % |
Unconsolidated JV Properties - at the JV's 100% Share (10) | | | | | | | | | | | | | | |||||||||||||||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | - | | | | | | | | |||||||||||||||||||||||||
New Property Development | | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
Atlanta, GA (DC-2) (15) | | 2018 | | 495,000 | | — | | — | | — | | — | | — | % | | | — | | — | | 240,000 | | — | % | |||||||||||||||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | | | |||||||||||||||||||||||||
Unconsolidated Properties - at the Entity's 100% Share (16) | Unconsolidated Properties - at the Entity's 100% Share (16) | | | | | | | | | | | | | | ||||||||||||||||||||||||||||||||||||
Manassas, VA | | 2018 | | 118,031 | | 22,400 | | 12,663 | | 39,044 | | 74,107 | | 100.0 | % | | $ | 8,235,171 | | 24 | | 66,324 | | 33.8 | % | | 2018 | | 118,031 | | 33,600 | | 12,663 | | 39,044 | | 85,307 | | 100.0 | % | | | 8,456,635 | | 135 | | 66,324 | | 50.7 | % |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
Total Properties | | | | 6,535,833 | | 1,579,088 | | 232,637 | | 1,421,481 | | 3,233,206 | | 88.2 | % | | $ | 397,478,125 | | 783 | | 2,888,799 | | 54.7 | % | | | | 7,187,195 | | 1,770,242 | | 250,520 | | 1,588,786 | | 3,609,548 | | 93.3 | % | | $ | 437,319,717 | | 956 | | 3,219,578 | | 55.0 | % |
(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) | Represents the year a property was acquired or, in the case of a property under lease, the year our initial lease commenced for the property. |
(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 |
(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 |
(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 cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from booked-not-billed contracts (as 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 of June 30, |
(10) | This property was formerly known as “Atlanta, GA (Metro)” but has been renamed “Atlanta, GA (DC-1)” to distinguish between the existing data center and the new property development shown as “Atlanta, GA (DC-2)” within the new property development section. |
(11) | Subject to long-term ground lease. |
(12) | The Dulles campus has two data center buildings and the Company is currently relocating customers from the smaller and older facility to the new facility in an effort to optimize its operating cost structure. |
(13) | Includes 7 facilities. All facilities are leased, including those subject to finance leases. |
(14) | Consists of Miami, FL; Lenexa, KS; Overland Park, KS; Eemshaven, Netherlands and Groningen, Netherlands facilities. |
(15) | Represents the development of a new data center building at our Atlanta, GA campus. |
(16) | Represents the Company’s unconsolidated |
* Subject to long term ground lease.
**Includes 9 facilities. All facilities are leased, including those subject to finance leases.
*** Consists of Miami, FL; Lenexa, KS; Overland Park, KS; Eemshaven, Netherlands and Groningen, Netherlands facilities.
Key Operating Metrics
The following sets forth definitions for our key operating metrics. These metrics may differ from similar definitions used by other companies.
Monthly Recurring Revenue (“MRR”). We calculate MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our rental and cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from booked-not-billed leases as of a particular date, unless otherwise specifically noted. MRR does not reflect any accounting associated with any free rent, rent abatements or future scheduled rent increases and also excludes operating expense and power reimbursements.
Annualized Rent. We define annualized rent as MRR multiplied by 12.
Rental Churn. We define rental churn as the 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.
51
Leasable Raised Floor. We define leasable raised floor as the amount of raised floor square footage that we have leased plus the available capacity of raised floor square footage that is in a leasable format as of a particular date and according to a particular product configuration. The amount of our leasable raised floor may change even without completion of new development projects due to changes in our configuration of space.
Percentage (%) Occupied and Billing Raised Floor. We define percentage occupied and billing raised floor as the square footage that is subject to a signed lease for which billing has commenced as of a particular date compared to leasable raised floor based on the current configuration of the properties as of that date, expressed as a percentage.
Booked-not-Billed.We define booked-not-billed as our customer leases that have been signed, but for which lease payments have not yet commenced.
Factors That May Influence Future Results of Operations and Cash Flows
Recent Accounting Pronouncements.We adopted the provisions of ASC Topic 606, Revenue from Contracts with Customers, effective January 1, 2018. We also adopted ASC Topic 842, Leases, effective January 1, 2019. For additional information with respect to the impact of the standards on our financial condition and results of operations, refer to Note 2 – Summary of Significant Accounting Policies.
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 of June 30, 2019,2020, we had in place customer leases generating revenue for approximately 88%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. FutureThe impact of 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, future economic downturns, regional downturns or downturns in the technology industry, new technological developments,
49
evolving industry demands and other similar factors could impair our ability to attract new customers or renew existing customers’ leases on favorable terms, or at all, and could adversely affect our customers’ ability to meet their obligations to us. NegativeFor example, since the beginning of the economic disruptions from COVID-19, we have experienced a modest increase in customer requests for payment relief and also have experienced modest delays in construction activity in a few of our markets, primarily as a result of availability of contractors and slower permitting as more fully described under the caption “The COVID-19 Pandemic.” During the second quarter of 2020, the pace of additional customer requests for extended payment terms moderated while a number of customers who had previously asked for extended payment terms have since resumed payments. In response to these customer requests, although we have not reduced future payments, we have in certain circumstances provided additional flexibility in the form of extended payment terms. Although as of the date of this report these developments have not had a known material adverse effect on the Company’s business, these or other negative trends in one or more of these or other factors described above could adversely affect our revenue in future periods, which would impact our results of operations and cash flows.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 of June 30, 2019, 46% of our MRR came from customers which individually occupied greater than or equal to 6,600 square feet of space (or2020, approximately 1 MW of power), with the remaining 54% attributable to customers utilizing less than 6,600 square feet of space. As of June 30, 2019, approximately 51%47% of our MRR was attributable to the metered power model, the majority of which is comprised of customers that individually occupy greater than 6,600 square feet of space.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 of June 30, 2019,2020, the remaining approximately 49%53% 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 and 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 12% and 15%19% of our total leased raised floor are scheduled to expire during the years ending December 31, 20192020 (including all month-to-month leases) and 2020,2021, respectively. These leases also represented
52
approximately 19% and 22%, respectively, of our annualized rent as of June 30, 2019.2020. 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 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 from our current cash and cash equivalents, borrowings under our credit facilities to fund our redevelopment projects,facility and the forward equity transactiontransactions. Since the beginning of the economic disruptions from COVID-19, we completed duringhave experienced modest delays in construction activity in a few of our markets, primarily as a result of availability of contractors and slower permitting as more fully described under the six months ended June 30, 2019.caption “The COVID-19 Pandemic.” During the second quarter, we are pleased to report that our commitments to customers remain on track and we do not currently anticipate any meaningful delays in our development activity associated with our booked-not-billed backlog in 2020 assuming current trends continue.
Unconsolidated joint venture.Entity. On February 22, 2019, we entered into a joint venturean agreement with Alinda, a premieran infrastructure investment firm, with respect to our Manassas data center. At closing, we contributed cash and our Manassas data center (a 118,000 square foot
50
hyperscale data center under development in Manassas, Virginia), and Alinda contributed cash, in each case in exchange for a 50% interest in the joint venture.unconsolidated entity. The Manassas 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. At the closing, we received approximately $53 million in net proceeds, which was funded from the cash contributed by Alinda and also borrowings under a $164.5 million secured credit facility entered into by the joint ventureunconsolidated entity at closing that carries a rate of LIBOR plus 2.00% to 2.25%. depending on the existing leverage ratio. We used these distributions to pay down our revolving credit facility and for general corporate purposes. Under the joint venture agreement, we will receive additional distributions in the future as and when we complete development of each phase of the Manassas data center and place it into service, which allows us to receive distributions for Alinda’s share of the joint ventureunconsolidated 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 joint venture.agreement. Under the joint venture agreement, we will serve as the joint venture’sunconsolidated entity’s operating member, subject to authority and oversight of a board appointed by usAlinda and Alinda,us, and separately we will serve as manager and developer of the facility in exchange for management and development fees. The joint venture 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 joint venture isagreement has been reflected as an unconsolidated joint ventureentity on our reported financial statements beginning in the first quarter of 2019.
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 substantially alla 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. During the six months ended June 30, 2020 we experienced an increase in certain operating costs, partially driven by an increase in bad debt expense which was due to the risk of non-payment for customers experiencing business disruptions due to COVID-19. We also incur general and administrative expenses, including expenses relating to senior management, our in-house sales and marketing organization, cloud and managed services support personnel and legal, human resources, accounting and other expenses related to professional services. We also will incur additional expenses arising from being a publicly traded company, including employee equity-based compensation. Increases or decreases in our operating expenses will impact our results of operations and cash flows. We expect to incur additional operating expenses as we continue to expand. Although, as of the date of this report, the expenses described above related to the COVID-19 pandemic have not had a known material adverse effect on the Company’s business, these or other negative trends in one or more of these or other factors described above could adversely affect our operating expenses in future periods, which would impact our results of operations and cash flows.
53
General Leasing Activity
Information is provided in the tables below for both our leasing activity as well as booked-not-billed balances.
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.
In regard to 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
51
footage remained consistent before and after renewal. All customers with space changes are incorporated into new/modified leasing statistics and rates.
We define booked-not-billed as our customer leases that have been signed, but for which lease payments have not yet commenced.
The following leasing and booked-not-billed (“BNB”) statistics include results of the consolidated business as well as QTS’ 50% pro rata share of revenue from the unconsolidated joint venture.entity, if any.
Below our sales activity is outlined for the three and six months ended June 30, 2019:
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | | | | | Incremental | | | | | | | | | Incremental | | | ||||||
| | | Number of | | Annualized rent | | Annualized Rent, Net | | | | | Number of | | Annualized rent (1) | | Annualized Rent (1), Net | | | ||||||
| Period |
| Leases |
| per leased sq ft |
| of Downgrades | | | | Period |
| Leases |
| per leased sq ft |
| of Downgrades | | | | ||||
New/modified leases signed | Three Months Ended June 30, 2019 | | 404 | | $ | 544 | | $ | 19,624,574 | | | | Three Months Ended June 30, 2020 | | 499 | | $ | 548 | | $ | 21,044,584 | | | |
| Six Months Ended June 30, 2019 | | 924 | | $ | 516 | | $ | 30,929,298 | | | | Six Months Ended June 30, 2020 | | 985 | | $ | 458 | | $ | 42,877,352 | | | |
| | | | | | | | | | | | | | | | | | | | | | | | |
| | | Number of | | | | | | | | | Number of | | | | | | | | | ||||
| | | Renewed | | Annualized rent | | | | | | | Renewed | | Annualized rent (1) | | | | | | | ||||
| Period |
| Leases |
| per leased sq ft |
| Annualized Rent | | Rent Change | Period |
| Leases |
| per leased sq ft |
| Annualized Rent (1) | | Rent Change | ||||||
Renewed Leases | Three Months Ended June 30, 2019 | | 109 | | $ | 732 | | $ | 13,938,384 | | 1.2 | % | Three Months Ended June 30, 2020 | | 112 | | $ | 509 | | $ | 19,555,593 | | 2.6 | % |
| Six Months Ended June 30, 2019 | | 197 | | $ | 829 | | $ | 25,394,412 | | 1.4 | % | Six Months Ended June 30, 2020 | | 190 | | $ | 600 | | $ | 30,834,978 | | 3.5 | % |
(1) | We define annualized rent as MRR as of June 30, 2020, 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 table includes QTS’ 50% pro rata share of BNB revenue from the unconsolidated joint venture and outlines the BNBbooked-not-billed balance as of June 30, 20192020 and how that willis expected to affect revenue in 20192020 and subsequent years:
| | | | | | | | | | | | | | | | | | | | | | | | |
Booked-not-billed ("BNB") (1) |
| | 2019 |
| | 2020 |
| | Thereafter |
| | Total |
| | 2020 |
| | 2021 |
| | Thereafter |
| | Total |
MRR | | $ | 1,836,981 | | $ | 1,407,302 | | $ | 2,448,955 | | $ | 5,693,238 | | $ | 2,367,273 | | $ | 4,353,135 | | $ | 2,543,507 | | $ | 9,263,915 |
Incremental revenue (2) | | | 6,691,103 | | | 10,252,987 | | | 29,150,064 | | | | | | 8,828,593 | | | 34,492,470 | | | 30,522,086 | | | |
Annualized revenue (3) (4) | | $ | 22,043,772 | | $ | 16,887,624 | | $ | 29,150,064 | | $ | 68,081,460 | | $ | 28,407,275 | | $ | 52,237,623 | | $ | 30,522,086 | | $ | 111,166,984 |
(1) | Includes the Company’s consolidated booked-not-billed balance in addition to booked-not-billed revenue associated with the unconsolidated |
(2) | Incremental revenue represents the expected amount of recognized MRR for the business in the period based on when the booked-not-billed leases commence throughout the period. |
(3) | Annualized revenue represents the booked-not-billed MRR multiplied by 12, demonstrating how much recognized MRR might have been recognized if the booked-not-billed leases commencing in the period were in place for an entire year. |
(4) | As of June 30, |
The amounts in the table above represent MRR from our customer leases that have been executed, but for which cash lease payments have not yet commenced.
The Company estimates the remaining cost to provide the space, power, connectivity and other services to the customer contracts which had not billed as of June 30, 20192020 to be approximately $100$138 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 existing space which was previously developed.
5452
Results of Operations
Three Months Ended June 30, 20192020 Compared to Three Months Ended June 30, 20182019
Changes in revenues and expenses for the three months ended June 30, 20192020 compared to the three months ended June 30, 20182019 are summarized below (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | Three Months Ended June 30, | | | | | | | ||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| 2020 |
| 2019 |
| $ Change |
| % Change | ||||||||
Revenues: | | | | | | | | | | | | | | | | | | | | | | | | |
Rental | | $ | 114,977 | | $ | 101,086 | | $ | 13,891 | | 14 | % | | $ | 125,996 | | $ | 114,977 | | $ | 11,019 | | 10 | % |
Other | | | 4,190 | | | 11,191 | | | (7,001) | | (63) | % | | | 5,644 | | | 4,190 | | | 1,454 | | 35 | % |
Total revenues | | | 119,167 | | | 112,277 | | | 6,890 | | 6 | % | | | 131,640 | | | 119,167 | | | 12,473 | | 10 | % |
Operating expenses: | | | | | | | | | | | | | | | | | | | | | | | | |
Property operating costs | | | 38,570 | | | 36,558 | | | 2,012 | | 6 | % | | | 40,349 | | | 38,570 | | | 1,779 | | 5 | % |
Real estate taxes and insurance | | | 3,355 | | | 2,903 | | | 452 | | 16 | % | | | 4,106 | | | 3,355 | | | 751 | | 22 | % |
Depreciation and amortization | | | 41,481 | | | 37,820 | | | 3,661 | | 10 | % | | | 47,554 | | | 41,481 | | | 6,073 | | 15 | % |
General and administrative | | | 20,124 | | | 21,031 | | | (907) | | (4) | % | | | 21,391 | | | 20,124 | | | 1,267 | | 6 | % |
Transaction and integration costs | | | 1,039 | | | 653 | | | 386 | | 59 | % | | | 381 | | | 1,039 | | | (658) | | (63) | % |
Restructuring | | | — | | | 11,430 | | | (11,430) | | * | % | ||||||||||||
Total operating expenses | | | 104,569 | | | 110,395 | | | (5,826) | | (5) | % | | | 113,781 | | | 104,569 | | | 9,212 | | 9 | % |
Operating income | | | 14,598 | | | 1,882 | | | 12,716 | | 676 | % | | | 17,859 | | | 14,598 | | | 3,261 | | 22 | % |
Other income and expense: | | | | | | | | | | | | | | | | | | | | | | | | |
Interest income | | | 36 | | | 25 | | | 11 | | 44 | % | | | 2 | | | 36 | | | (34) | | (94) | % |
Interest expense | | | (6,459) | | | (8,203) | | | (1,744) | | (21) | % | | | (6,924) | | | (6,459) | | | 465 | | 7 | % |
Other income (expense) | | | (40) | | | — | | | 40 | | * | % | | | — | | | (40) | | | (40) | | (100) | % |
Equity in earnings (loss) of unconsolidated entities | | | (401) | | | — | | | (401) | | * | % | ||||||||||||
Income (loss) before taxes | | | 7,734 | | | (6,296) | | | 14,030 | | 223 | % | ||||||||||||
Tax benefit (expense) of taxable REIT subsidiaries | | | (199) | | | (137) | | | (62) | | (45) | % | ||||||||||||
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 13,968 | | 217 | % | ||||||||||||
Equity in net loss of unconsolidated entity | | | (590) | | | (401) | | | 189 | | 47 | % | ||||||||||||
Income before taxes | | | 10,347 | | | 7,734 | | | 2,613 | | 34 | % | ||||||||||||
Tax expense of taxable REIT subsidiaries | | | (138) | | | (199) | | | (61) | | (31) | % | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 2,674 | | 35 | % |
Revenues. Total revenues for the three months ended June 30, 20192020 were $119.2$131.6 million compared to $112.3$119.2 million for the three months ended June 30, 2018.2019. The increase of $6.9$12.5 million, or 6%10%, was largely attributable to growth in our hyperscale and hybrid colocation offerings, primarily through increases in revenues in the Atlanta-Metro, Richmond,Ashburn, Atlanta (DC-1), Chicago, and ChicagoFort Worth data centers, and placing additional square footage into service.centers. Offsetting these increases were revenue reductions primarily in Richmond and various leased facilities partly associated with our transition of certain cloud and managed services as a part of the strategic growth plan implemented in the prior year.migration from those leased facilities.
53
Property Operating Costs. Property operating costs for the three months ended June 30, 20192020 were $38.6$40.3 million compared to property operating costs of $36.6$38.6 million for the three months ended June 30, 2018,2019, an increase of $2.0
55
$1.8 million, or 6%5%. The breakdown of our property operating costs is summarized in the table below (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended June 30, | | | | | | | | Three Months Ended June 30, | | | | | | | ||||||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change |
| 2020 |
| 2019 |
| $ Change |
| % Change | ||||||||
Property operating costs: | | | | | | | | | | | | | | | | | | | | | | | | |
Direct payroll | | $ | 6,042 | | $ | 5,413 | | $ | 629 | | 12 | % | | $ | 6,939 | | $ | 6,042 | | $ | 897 | | 15 | % |
Rent | | | 3,117 | | | 3,317 | | | (200) | | (6) | % | | | 2,717 | | | 3,117 | | | (400) | | (13) | % |
Repairs and maintenance | | | 3,474 | | | 3,830 | | | (356) | | (9) | % | | | 3,360 | | | 3,474 | | | (114) | | (3) | % |
Utilities | | | 15,557 | | | 13,492 | | | 2,065 | | 15 | % | | | 16,307 | | | 15,557 | | | 750 | | 5 | % |
Management fee allocation | | | 4,580 | | | 5,298 | | | (718) | | (14) | % | | | 4,828 | | | 4,580 | | | 248 | | 5 | % |
Other | | | 5,800 | | | 5,208 | | | 592 | | 11 | % | | | 6,198 | | | 5,800 | | | 398 | | 7 | % |
Total property operating costs | | $ | 38,570 | | $ | 36,558 | | $ | 2,012 | | 6 | % | | $ | 40,349 | | $ | 38,570 | | $ | 1,779 | | 5 | % |
The increase in total property operating costs was attributableprimarily due to aggregate expense increases of $3.3 million, primarilyongoing company growth, largely driven by increasedincreases in direct payroll and utilities expense. The increase to utilities expense largelywas primarily related to increased expense associated with increased power usage relatedand partially offset by lower utility rates in the Atlanta market. Rent expense decreased primarily due to growth in our hyperscale offering, increased direct payroll costs and an increase in other expenses. Offsetting these increases were aggregate expense reductionstransition out of $1.3 million primarily related to reduced management fee allocation ontwo small international leased facilities reduced repairs and maintenance costs and lower rent expense associated with our exit of certain leased facilities tied to our strategic growth plan in the prior year whereby we transitioned away from certainsecond half of our cloud and managed services offerings.2019.
Real Estate Taxes and Insurance. Real estate taxes and insurance for the three months ended June 30, 20192020 were $3.4$4.1 million compared to $2.9$3.4 million for the three months ended June 30, 2018.2019. The increase of $0.5$0.8 million, or 16%22%, was primarily attributable to an increase in taxes at our Irving, facility.Fort Worth, Chicago, and Ashburn facilities.
Depreciation and Amortization. Depreciation and amortization for the three months ended June 30, 20192020 was $41.5$47.6 million compared to $37.8$41.5 million for the three months ended June 30, 2018.2019. The increase of $3.7$6.1 million, or 10%15%, was due primarily to additional depreciation expense relating to an increase in assets placed in service at our Atlanta-Metro, Ashburn, Chicago and ChicagoFort Worth facilities.
General and Administrative Expenses. General and administrative expenses were $21.4 million for the three months ended June 30, 2020 compared to general and administrative expenses of $20.1 million for the three months ended June 30, 2019, compared to general and administrative expensesan increase of $21.0 million for the three months ended June 30, 2018, a decrease of $0.9$1.3 million, or 4%6%. The decreaseincrease was primarily attributable to the implementation of the aforementioned strategic growth plan, resultingan increase in equity-based compensation expense which was partially offset by a decreasereduction in net payrolltravel and entertainment related expenses.
Transaction and Integration Costs. Transaction and integration costs were $0.4 million for the three months ended June 30, 2020, compared to $1.0 million for the three months ended June 30, 2019, compared to2019. The decrease of $0.7 million, for the three months ended June 30, 2018. The increase of $0.4 million, or 59%63%, was primarily relatedattributable to increaseda decrease in costs associated with the assessment of actual and potential acquisitions during the three months ended June 30, 2019.
Restructuring Costs. Restructuring costs, which are costs associated with our strategic growth plan in the prior year, were $11.4 million for the three months ended June 30, 2018, primarily related to employee severance expenses, professional fees, acceleration of equity-based compensation awards and the sale or write-off of certain product-related assets. No such costs were incurred during the three months ended June 30, 2019.2020.
Interest Expense. Interest expense for the three months ended June 30, 20192020 was $6.5$6.9 million compared to $8.2$6.5 million for the three months ended June 30, 2018. The decrease of $1.7 million, or 21%, was due primarily to a higher level of capitalized interest due to continued ongoing capital development projects, partially offset by an increase in interest costs related to an increase in the2019. Our average total debt balance increased from the prior period which was offset by a decrease in interest rates which led to a similar level of $118.0 million.total interest costs incurred compared to the prior period.
Other Income (Expense). Other income (expense) represents the impact of foreign currency exchange rate fluctuations on the value ofour net investments in foreign subsidiaries whose functional currencies are other than the U.S. Dollar. We
56
recognized less than $0.1 million of expense onno foreign currency translation adjustmentsgain (loss) related to our investment in the Netherlands facilities during the period, with no such expenses incurred during the prior year.three months ended June 30, 2020. Prior to February 2020, gains or losses from foreign currency transactions 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 earningsnet income (loss) of unconsolidated entitiesentity. This represents equity in earnings (loss) of our joint ventureunconsolidated entity formed during the first quarter of 2019 that owns our Manassas data center. Our share
54
Tax Expense (Benefit) of Taxable REIT Subsidiaries. The tax expense of our taxable REIT subsidiaries for the three months ended June 30, 20192020 was $0.1 million which remained consistent when compared to $0.2 million compared to a $0.1 millionof tax expense for the three months ended June 30, 2018. The current and prior period tax expense primarily related to state tax expense associated with recorded operating results, and valuation allowances recorded against certain federal and state deferred tax assets.2019.
Six Months Ended June 30, 20192020 Compared to Six Months Ended June 30, 20182019
Changes in revenues and expenses for the six months ended June 30, 20192020 compared to the six months ended June 30, 20182019 are summarized below (unaudited and in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | ||||
|
| 2019 |
| 2018 |
| $ Change |
| % Change | ||||
Revenues: | | | | | | | | | | | | |
Rental | | $ | 224,366 | | $ | 201,014 | | $ | 23,352 | | 12 | % |
Other | | | 7,490 | | | 24,960 | | | (17,470) | | (70) | % |
Total revenues | | | 231,856 | | | 225,974 | | | 5,882 | | 3 | % |
Operating expenses: | | | | | | | | | | | | |
Property operating costs | | | 72,673 | | | 74,298 | | | (1,625) | | (2) | % |
Real estate taxes and insurance | | | 6,722 | | | 5,808 | | | 914 | | 16 | % |
Depreciation and amortization | | | 80,269 | | | 73,733 | | | 6,536 | | 9 | % |
General and administrative | | | 40,015 | | | 43,265 | | | (3,250) | | (8) | % |
Transaction and integration costs | | | 2,253 | | | 1,573 | | | 680 | | 43 | % |
Restructuring | | | — | | | 19,960 | | | (19,960) | | * | % |
Total operating expenses | | | 201,932 | | | 218,637 | | | (16,705) | | (8) | % |
Gain on sale of real estate, net | | | 13,408 | | | — | | | 13,408 | | * | % |
Operating income | | | 43,332 | | | 7,337 | | | 35,995 | | 491 | % |
Other income and expense: | | | | | | | | | | | | |
Interest income | | | 81 | | | 26 | | | 55 | | 212 | % |
Interest expense | | | (13,605) | | | (16,313) | | | (2,708) | | 17 | % |
Other income (expense) | | | (40) | | | — | | | (40) | | * | % |
Equity in earnings (loss) of unconsolidated entity | | | (675) | | | — | | | (675) | | * | % |
Income (loss) before taxes | | | 29,093 | | | (8,950) | | | 38,043 | | 425 | % |
Tax benefit (expense) of taxable REIT subsidiaries | | | (410) | | | 2,265 | | | (2,675) | | (118) | % |
Net income (loss) | | $ | 28,683 | | $ | (6,685) | | $ | 35,368 | | 529 | % |
_________________________
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | ||||
|
| 2020 |
| 2019 |
| $ Change |
| % Change | ||||
Revenues: | | | | | | | | | | | | |
Rental | | $ | 246,077 | | $ | 224,366 | | $ | 21,711 | | 10 | % |
Other | | | 11,855 | | | 7,490 | | | 4,365 | | 58 | % |
Total revenues | | | 257,932 | | | 231,856 | | | 26,076 | | 11 | % |
Operating expenses: | | | | | | | | | | | | |
Property operating costs | | | 81,130 | | | 72,673 | | | 8,457 | | 12 | % |
Real estate taxes and insurance | | | 8,017 | | | 6,722 | | | 1,295 | | 19 | % |
Depreciation and amortization | | | 92,624 | | | 80,269 | | | 12,355 | | 15 | % |
General and administrative | | | 42,074 | | | 40,015 | | | 2,059 | | 5 | % |
Transaction and integration costs | | | 597 | | | 2,253 | | | (1,656) | | (74) | % |
Total operating expenses | | | 224,442 | | | 201,932 | | | 22,510 | | 11 | % |
Gain on sale of real estate, net | | | — | | | 13,408 | | | (13,408) | | (100) | % |
Operating income | | | 33,490 | | | 43,332 | | | (9,842) | | (23) | % |
Other income and expense: | | | | | | | | | | | | |
Interest income | | | 2 | | | 81 | | | (79) | | (98) | % |
Interest expense | | | (14,086) | | | (13,605) | | | 481 | | 4 | % |
Other income (expense) | | | 159 | | | (40) | | | (199) | | (498) | % |
Equity in net loss of unconsolidated entity | | | (1,267) | | | (675) | | | 592 | | 88 | % |
Income (loss) before taxes | | | 18,298 | | | 29,093 | | | (10,795) | | (37) | % |
Tax benefit (expense) of taxable REIT subsidiaries | | | 31 | | | (410) | | | (441) | | (108) | % |
Net income | | $ | 18,329 | | $ | 28,683 | | $ | (10,354) | | (36) | % |
Revenues.Revenues. Total revenues for the six months ended June 30, 20192020 were $231.9$257.9 million compared to $226.0$231.9 million for the six months ended June 30, 2018.2019. The increase of $5.9$26.1 million, or 3%11%, was largely attributable to growth in our hyperscale and hybrid colocation offerings, primarily through increases in revenues in the Atlanta-Metro, Irving, Richmond,Ashburn, Atlanta (DC-1), Chicago, and ChicagoFort Worth data centers and placing additional square footage into service.centers. Offsetting these increases were revenue reductions in Richmond and various leased facilities partly associated with our transition of certain cloud and managed services as a part of the strategic growth plan implemented in the prior year.exit from those leased facilities.
57
Property Operating Costs. Property operating costs for the six months ended June 30, 20192020 were $72.7$81.1 million compared to property operating costs of $74.3$72.7 million for the six months ended June 30, 2018, a decrease2019, an increase of $1.6$8.5 million, or 2%12%. The breakdown of our property operating costs is summarized in the table below (unaudited and in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | ||||
|
| 2019 | | 2018 |
| $ Change |
| % Change | ||||
Property operating costs: | | | | | | | | | | | | |
Direct payroll | | $ | 11,768 | | $ | 11,178 | | $ | 590 | | 5 | % |
Rent | | | 6,287 | | | 6,928 | | | (641) | | (9) | % |
Repairs and maintenance | | | 6,285 | | | 7,957 | | | (1,672) | | (21) | % |
Utilities | | | 29,410 | | | 27,965 | | | 1,445 | | 5 | % |
Management fee allocation | | | 9,046 | | | 10,553 | | | (1,507) | | (14) | % |
Other | | | 9,877 | | | 9,717 | | | 160 | | 2 | % |
Total property operating costs | | $ | 72,673 | | $ | 74,298 | | $ | (1,625) | | (2) | % |
55
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | | | | | | ||||
|
| 2020 | | 2019 |
| $ Change |
| % Change | ||||
Property operating costs: | | | | | | | | | | | | |
Direct payroll | | $ | 13,467 | | $ | 11,768 | | $ | 1,699 | | 14 | % |
Rent | | | 5,466 | | | 6,287 | | | (821) | | (13) | % |
Repairs and maintenance | | | 6,699 | | | 6,285 | | | 414 | | 7 | % |
Utilities | | | 31,295 | | | 29,410 | | | 1,885 | | 6 | % |
Management fee allocation | | | 9,505 | | | 9,046 | | | 459 | | 5 | % |
Other | | | 14,698 | | | 9,877 | | | 4,821 | | 49 | % |
Total property operating costs | | $ | 81,130 | | $ | 72,673 | | $ | 8,457 | | 12 | % |
The decreaseincrease in total property operating costs was attributableprimarily due to aggregateongoing company growth, largely driven by increases in direct payroll and utilities expense. The increase to utilities expense reductions of $3.8 millionwas primarily related to increased power usage and partially offset by lower utility rates in the Atlanta market. In addition, there was an increase in bad debt expense which was partially attributable to the risk of a loss across our portfolio of lease receivables primarily related to customers experiencing business disruptions due to COVID-19, which is included in the “Other” line item of the property operating costs table above. Rent expense decreased primarily due to our transition from our cloud and managed services offerings associated with our strategic growth plan, with expense reductions primarilyout of two small international leased facilities in repairs and maintenance, rent expense and management fee allocation on leased facilities.the second half of 2019.
Real Estate Taxes and Insurance. Real estate taxes and insurance for the six months ended June 30, 20192020 were $6.7$8.0 million compared to $5.8$6.7 million for the six months ended June 30, 2018.2019. The increase of $0.9$1.3 million, or 16%19%, was primarily attributable to an increase in taxes at our Irving, Fort Worth, and ChicagoAshburn facilities.
Depreciation and Amortization. Depreciation and amortization for the six months ended June 30, 20192020 was $80.3$92.6 million compared to $73.7$80.3 million for the six months ended June 30, 2018.2019. The increase of $6.5$12.4 million, or 9%15%, was due primarily to additional depreciation expense primarily relating to an increase in assets placed in service at our Atlanta-Metro, Ashburn, Chicago and IrvingFort Worth facilities.
General and Administrative Expenses. General and administrative expenses were $40.0 million for six months ended June 30, 2019 compared to general and administrative expenses of $43.3$42.1 million for the six months ended June 30, 2018, a decrease2020 compared to general and administrative expenses of $3.3$40.0 million for the six months ended June 30, 2019, an increase of $2.1 million, or 8%5%. The decreaseincrease was primarily attributable to the aforementioned strategic growth plan, resultingan increase in equity-based compensation expense which was partially offset in a decrease in net payroll expensesreduction to travel and outside services fees.entertainment expenses.
Transaction and Integration Costs.Transaction and integration costs were $0.6 million for the six months ended June 30, 2020, compared to $2.3 million for the six months ended June 30, 2019, compared to $1.6 million for the six months ended June 30, 2018.2019. The increasedecrease of $0.7$1.7 million, or 43%74%, was primarily relatedattributable to increaseda decrease in costs associated with the assessment of actual and potential acquisitions during the six months ended June 30, 2019.
Restructuring Costs. Restructuring costs, which are costs associated with our strategic growth plan in the prior year, were $20.0 million for the six months ended June 30, 2018, primarily related to employee severance expenses, professional fees, acceleration of equity-based compensation awards and the sale or write-off of certain product-related assets. No restructuring costs were incurred during the six months ended June 30, 2019.2020.
Gain on sale of real estate, net.The gain on sale of real estate net incurred during the six months ended June 30, 2019 represents theprimarily relates to a $13.4 million net gain realized upon sale of the Manassas facility to the joint venture andunconsolidated entity which represents the fair value of cash and noncash consideration received in the sale transaction, net of costs directly related to the sale in excess of the carrying amounts of the assets.
Interest Expense. Interest expense for the six months ended June 30, 20192020 was $13.6$14.1 million compared to $16.3$13.6 million for the six months ended June 30, 2018. The decrease of $2.7 million, or 17%, was due primarily to a higher level of
58
capitalized interest due to continued ongoing capital development projects, partially offset by an increase in interest costs related to an increase in the2019. Our average total debt balance increased from the prior period which was offset by a decrease in interest rates which led to a similar level of $98.1 million.total interest costs incurred compared to the prior period.
Other Income (Expense). Other income (expense) represents the impact of foreign currency exchange rate fluctuations on the value of investments in foreign subsidiaries whose functional currencies are other than the U.S. Dollar. We recognized less than $0.1$0.2 million of expense on foreign currency translation adjustmentsgain related to our investment in the Netherlands facilities during the period, with no such expenses incurred during the prior year.six months ended June 30, 2020. Prior to February 2020, gains or losses from foreign currency transactions 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).
56
Equity in earningsnet income (loss) of unconsolidated entitiesentity. This represents equity in earnings (loss) of our joint ventureunconsolidated entity formed during the first quarter of 2019 that owns our Manassas data center. EquityThe increase in net loss was $0.7 million for the six months ended June 30, 2019.2020 compared to June 30, 2019 was primarily attributable to the unconsolidated entity being in place for two full quarters in the current period compared to only one quarter of the prior period.
Tax Expense (Benefit) of Taxable REIT Subsidiaries. Tax expenseThe tax benefit of our taxable REIT subsidiaries for the six months ended June 30, 20192020 was less than $0.01 million which remained relatively consistent when compared to $0.4 million compared to aof tax benefit of $2.3 millionexpense for the six months ended June 30, 2018. The current period tax expense primarily related to current state tax expense associated with recorded operating results, and valuation allowances recorded against certain federal and state deferred tax assets. The prior period tax benefit primarily related to recorded operating losses.2019.
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; (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 FFO, Operating FFO, Adjusted Operating FFO, MRR, NOI, EBITDAre and Adjusted EBITDA as reported by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us.
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 in the selected financial information below.
5957
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 and land related to our primary business, impairment write-downs of depreciable real estate and land 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 chargesamounts in our calculation of FFO. Our management uses FFO as a supplemental 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 core 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 and bond discount, non-real estate depreciation and amortization, straight line rent adjustments, deferredincome taxes, equity-based compensation and non-cash compensation.similar adjustments for unconsolidated entities.
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 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 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.
6058
A reconciliation of net income (loss) to FFO, Operating FFO and Adjusted Operating FFO is presented below (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
FFO | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) | ||||||||||||
Equity in net (income) loss of unconsolidated entity | | | 401 | | | — | | | 675 | | | — | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 | ||||||||||||
Equity in net loss of unconsolidated entity | | | 590 | | | 401 | | | 1,267 | | | 675 | ||||||||||||
Real estate depreciation and amortization | | | 38,544 | | | 33,843 | | | 74,471 | | | 65,900 | | | 44,196 | | | 38,544 | | | 85,896 | | | 74,471 |
Gain on sale of real estate, net | | | — | | | — | | | (13,408) | | | — | | | — | | | — | | | — | | | (13,408) |
Pro rata share of FFO from unconsolidated entity | | | 344 | | | — | | | 385 | | | — | | | 399 | | | 344 | | | 677 | | | 385 |
FFO | | | 46,824 | | | 27,410 | | | 90,806 | | | 59,215 | | | 55,394 | | | 46,824 | | | 106,169 | | | 90,806 |
Preferred stock dividends | | | (7,045) | | | (2,248) | | | (14,090) | | | (2,576) | | | (7,045) | | | (7,045) | | | (14,090) | | | (14,090) |
FFO available to common stockholders & OP unit holders | | | 39,779 | | | 25,162 | | | 76,716 | | | 56,639 | | | 48,349 | | | 39,779 | | | 92,079 | | | 76,716 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Restructuring costs | | | — | | | 11,430 | | | — | | | 19,960 | ||||||||||||
Transaction and integration costs | | | 1,039 | | | 653 | | | 2,253 | | | 1,573 | | | 381 | | | 1,039 | | | 597 | | | 2,253 |
Tax benefit associated with restructuring, transaction and integration costs | | | — | | | (41) | | | — | | | (1,676) | ||||||||||||
Operating FFO available to common stockholders & OP unit holders* | | | 40,818 | | | 37,204 | | | 78,969 | | | 76,496 | ||||||||||||
Operating FFO available to common stockholders & OP unit holders (1) | | | 48,730 | | | 40,818 | | | 92,676 | | | 78,969 | ||||||||||||
| | | | | | | | | | | | | | | | | | | | | | | | |
Maintenance Capex | | | (2,233) | | | (2,612) | | | (2,942) | | | (3,542) | ||||||||||||
Maintenance capital expenditures | | | (4,220) | | | (2,233) | | | (5,882) | | | (2,942) | ||||||||||||
Leasing commissions paid | | | (6,528) | | | (7,671) | | | (13,043) | | | (13,581) | | | (6,805) | | | (6,528) | | | (15,803) | | | (13,043) |
Amortization of deferred financing costs and bond discount | | | 979 | | | 961 | | | 1,957 | | | 1,923 | ||||||||||||
Amortization of deferred financing costs | | | 991 | | | 979 | | | 1,978 | | | 1,957 | ||||||||||||
Non real estate depreciation and amortization | | | 2,937 | | | 3,976 | | | 5,798 | | | 7,833 | | | 3,358 | | | 2,937 | | | 6,728 | | | 5,798 |
Straight line rent revenue and expense and other | | | (979) | | | (1,233) | | | (2,401) | | | (3,751) | | | (5,702) | | | (979) | | | (9,457) | | | (2,401) |
Tax expense (benefit) from operating results | | | 199 | | | 178 | | | 410 | | | (589) | | | 138 | | | 199 | | | (31) | | | 410 |
Equity-based compensation expense | | | 4,296 | | | 3,999 | | | 7,596 | | | 7,480 | | | 6,082 | | | 4,296 | | | 10,957 | | | 7,596 |
Adjustments for unconsolidated entity | | | (42) | | | — | | | (20) | | | — | | | (88) | | | (42) | | | (22) | | | (20) |
Adjusted Operating FFO available to common stockholders & OP unit holders* | | $ | 39,447 | | $ | 34,802 | | $ | 76,324 | | $ | 72,269 | ||||||||||||
Adjusted Operating FFO available to common stockholders & OP unit holders (1) | | $ | 42,484 | | $ | 39,447 | | $ | 81,144 | | $ | 76,324 |
(1) |
The Company’s calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition. |
6159
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 cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR is also calculated to include the Company’s 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 booked-not-billed leases as of a particular date, unless otherwise specifically noted.
Separately, we calculate recognized MRR as the recurring revenue recognized during a given period, which includes revenue from our rental and cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues.
Management uses MRR and recognized MRR as supplemental performance measures because they provide useful measures of increases in contractual revenue from 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 | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Recognized MRR in the period | | | | | | | | | | | | | | | | | | | | | | | | |
Total period revenues (GAAP basis) | | $ | 119,167 | | $ | 112,277 | | $ | 231,856 | | $ | 225,974 | | $ | 131,640 | | $ | 119,167 | | $ | 257,932 | | $ | 231,856 |
Less: Total period variable lease revenue from recoveries | | | (12,672) | | | (10,444) | | | (23,465) | | | (21,957) | | | (12,528) | | | (12,672) | | | (24,803) | | | (23,465) |
Total period deferred setup fees | | | (3,822) | | | (3,203) | | | (7,053) | | | (6,096) | | | (4,520) | | | (3,822) | | | (8,444) | | | (7,053) |
Total period straight line rent and other | | | (5,485) | | | (4,326) | | | (9,428) | | | (8,777) | | | (9,327) | | | (5,485) | | | (17,359) | | | (9,428) |
Recognized MRR in the period | | $ | 97,188 | | $ | 94,304 | | $ | 191,910 | | $ | 189,144 | | $ | 105,265 | | $ | 97,188 | | $ | 207,326 | | $ | 191,910 |
| | | | | | | | | | | | | | | | | | | | | | | | |
MRR at period end | | | | | | | | | | | | | | | | | | | | | | | | |
Total period revenues (GAAP basis) | | $ | 119,167 | | $ | 112,277 | | $ | 231,856 | | $ | 225,974 | | $ | 131,640 | | $ | 119,167 | | $ | 257,932 | | $ | 231,856 |
Less: Total revenues excluding last month | | | (77,863) | | | (74,562) | | | (190,552) | | | (188,259) | | | (87,538) | | | (77,863) | | | (213,830) | | | (190,552) |
Total revenues for last month of period | | | 41,304 | | | 37,715 | | | 41,304 | | | 37,715 | | | 44,102 | | | 41,304 | | | 44,102 | | | 41,304 |
Less: Last month variable lease revenue from recoveries | | | (4,222) | | | (3,597) | | | (4,222) | | | (3,597) | | | (4,350) | | | (4,222) | | | (4,350) | | | (4,222) |
Last month deferred setup fees | | | (1,322) | | | (1,083) | | | (1,322) | | | (1,083) | | | (1,533) | | | (1,322) | | | (1,533) | | | (1,322) |
Last month straight line rent and other | | | (3,349) | | | (1,884) | | | (3,349) | | | (1,884) | | | (2,480) | | | (3,349) | | | (2,480) | | | (3,349) |
Add: Pro rata share of MRR at period end of unconsolidated entity | | | 369 | | | — | | | 369 | | | — | | | 352 | | | 369 | | | 352 | | | 369 |
MRR at period end * | | $ | 32,780 | | $ | 31,151 | | $ | 32,780 | | $ | 31,151 | ||||||||||||
MRR at period end (1) | | $ | 36,091 | | $ | 32,780 | | $ | 36,091 | | $ | 32,780 |
| Does not include our booked-not-billed MRR balance, which was |
6260
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) of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing costs, other (income) expense, debt restructuring costs, gain (loss) on extinguishment of debt, transaction, integration and integrationimpairment 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 (with the exception of the leased facilities acquired in 2015, which were allocated a charge of 10% of cash revenues) 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 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 as computed in accordance with GAAP.
A reconciliation of net income to NOI is presented below (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 | �� | 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
Net Operating Income (NOI) | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) | ||||||||||||
Equity in net (income) loss of unconsolidated entity | | | 401 | | | — | | | 675 | | | — | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 | ||||||||||||
Equity in net loss of unconsolidated entity | | | 590 | | | 401 | | | 1,267 | | | 675 | ||||||||||||
Interest income | | | (36) | | | (25) | | | (81) | | | (26) | | | (2) | | | (36) | | | (2) | | | (81) |
Interest expense | | | 6,459 | | | 8,203 | | | 13,605 | | | 16,313 | | | 6,924 | | | 6,459 | | | 14,086 | | | 13,605 |
Depreciation and amortization | | | 41,481 | | | 37,819 | | | 80,269 | | | 73,733 | | | 47,554 | | | 41,481 | | | 92,624 | | | 80,269 |
Other (income) expense | | | 40 | | | — | | | 40 | | | — | | | — | | | 40 | | | (159) | | | 40 |
Tax expense (benefit) of taxable REIT subsidiaries | | | 199 | | | 137 | | | 410 | | | (2,265) | | | 138 | | | 199 | | | (31) | | | 410 |
Transaction and integration costs | | | 1,039 | | | 653 | | | 2,253 | | | 1,573 | | | 381 | | | 1,039 | | | 597 | | | 2,253 |
General and administrative expenses | | | 20,124 | | | 21,032 | | | 40,015 | | | 43,265 | | | 21,391 | | | 20,124 | | | 42,074 | | | 40,015 |
Gain on sale of real estate, net | | | — | | | — | | | (13,408) | | | — | | | — | | | — | | | — | | | (13,408) |
Restructuring | | | — | | | 11,430 | | | — | | | 19,960 | ||||||||||||
NOI from consolidated operations (1) | | $ | 77,242 | | $ | 72,816 | | $ | 152,461 | | $ | 145,868 | | $ | 87,185 | | $ | 77,242 | | $ | 168,785 | | $ | 152,461 |
Pro rata share of NOI from unconsolidated entity | | | 842 | | | — | | | 1,076 | | | — | | | 927 | | | 842 | | | 1,771 | | | 1,076 |
Total NOI (1) | | $ | 78,084 | | $ | 72,816 | | $ | 153,537 | | $ | 145,868 | | $ | 88,112 | | $ | 78,084 | | $ | 170,556 | | $ | 153,537 |
(1) | Includes facility level general and administrative allocation charges of 4% of cash revenue for all |
6361
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 (loss) (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 and unconsolidated entities,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 generally 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 expensesadjustments 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.
A reconciliation of net income to EBITDAre and Adjusted EBITDA is presented below (unaudited and in thousands):
| | | | | | | | | | | | | | | | | | | | | | | | |
| | Three Months Ended | | Six Months Ended | | Three Months Ended | | Six Months Ended | ||||||||||||||||
| | June 30, | | June 30, | | June 30, | | June 30, | ||||||||||||||||
|
| 2019 |
| 2018 |
| 2019 |
| 2018 |
| 2020 |
| 2019 |
| 2020 |
| 2019 | ||||||||
EBITDAre and Adjusted EBITDA | | | | | | | | | | | | | | | | | | | | | | | | |
Net income (loss) | | $ | 7,535 | | $ | (6,433) | | $ | 28,683 | | $ | (6,685) | ||||||||||||
Equity in net (income) loss of unconsolidated entity | | | 401 | | | — | | | 675 | | | — | ||||||||||||
Net income | | $ | 10,209 | | $ | 7,535 | | $ | 18,329 | | $ | 28,683 | ||||||||||||
Equity in net loss of unconsolidated entity | | | 590 | | | 401 | | | 1,267 | | | 675 | ||||||||||||
Interest income | | | (36) | | | (25) | | | (81) | | | (26) | | | (2) | | | (36) | | | (2) | | | (81) |
Interest expense | | | 6,459 | | | 8,203 | | | 13,605 | | | 16,313 | | | 6,924 | | | 6,459 | | | 14,086 | | | 13,605 |
Tax expense (benefit) of taxable REIT subsidiaries | | | 199 | | | 137 | | | 410 | | | (2,265) | | | 138 | | | 199 | | | (31) | | | 410 |
Depreciation and amortization | | | 41,481 | | | 37,819 | | | 80,269 | | | 73,733 | | | 47,554 | | | 41,481 | | | 92,624 | | | 80,269 |
(Gain) loss on disposition of depreciated property and impairment write-downs of depreciated property | | | — | | | 3,122 | | | (13,408) | | | 7,139 | ||||||||||||
Gain on disposition of depreciated property | | | — | | | — | | | — | | | (13,408) | ||||||||||||
Pro rata share of EBITDAre from unconsolidated entity | | | 863 | | | — | | | 1,078 | | | — | | | 924 | | | 863 | | | 1,743 | | | 1,078 |
EBITDAre | | | 56,902 | | | 42,823 | | | 111,231 | | | 88,209 | | | 66,337 | | | 56,902 | | | 128,016 | | | 111,231 |
| | | | | | | | | | | | | | | | | | | | | | | | |
Equity-based compensation expense | | | 4,296 | | | 3,999 | | | 7,596 | | | 7,480 | | | 6,082 | | | 4,296 | | | 10,957 | | | 7,596 |
Restructuring costs | | | — | | | 8,308 | | | — | | | 12,821 | ||||||||||||
Transaction and integration costs | | | 1,039 | | | 653 | | | 2,253 | | | 1,573 | | | 381 | | | 1,039 | | | 597 | | | 2,253 |
Adjusted EBITDA | | $ | 62,237 | | $ | 55,783 | | $ | 121,080 | | $ | 110,083 | | $ | 72,800 | | $ | 62,237 | | $ | 139,570 | | $ | 121,080 |
6462
Liquidity and Capital Resources
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.
In addition to the $249.6$379.5 million of capital expenditures incurred in the six months ended June 30, 20192020, we expect that we will incur approximately $250$275 million to $300$375 million in additional capital expenditures through December 31, 2019,2020 in connection with the development of our data center facilities, which excludes acquisitions and includes our 50% proportionate share of capital expenditures at the Manassas facility that was contributed to a joint venture.an unconsolidated entity. We expect to spend approximately $175$225 million to $225$275 million of capital expenditures with vendors on development, and the remainder on other capital expenditures and capitalized overheadinternal project costs (including capitalized interest, commissions, payroll and other similar costs), personal property and other less material capital projects. A significant portion of these expenditures are discretionary in nature and we may ultimately determine not to make these expenditures or the timing of such expenditures may vary.
We expect to meet these costs and our other short-term liquidity needs through operating cash flows,flow, cash and cash equivalents, borrowings under our credit facility, accessingproceeds from the forward equity net proceeds of approximately $147 million,transactions discussed below, additional equity issuances through our ATM program or other capital markets activity. We may also transfersell an interest in certain projects into unconsolidated entities as another source of capital.
Our net cash paid for capital expenditures for the six months ended June 30, 20192020 and 20182019 are summarized in the table below (unaudited and in thousands):
| | | | | | | | | | | | |
| | Six Months Ended June 30, | | Six Months Ended June 30, | ||||||||
|
| 2019 |
| 2018 |
| 2020 |
| 2019 | ||||
Development | | $ | 150,102 | | $ | 201,172 | | $ | 321,639 | | $ | 150,102 |
Acquisitions | | | 44,150 | | | 24,626 | | | 1,797 | | | 44,150 |
Maintenance capital expenditures | | | 2,942 | | | 3,542 | | | 5,882 | | | 2,942 |
Other capital expenditures (1) | | | 52,443 | | | 44,138 | | | 50,134 | | | 52,443 |
Total capital expenditures | | $ | 249,637 | | $ | 273,478 | | $ | 379,452 | | $ | 249,637 |
(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, payment of principal at maturity of our Senior Notes, funding payments for finance leases, dividend payments on our Series A Preferred Stock and Series B Preferred Stock and recurring and non-recurring capital expenditures. 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 which QTS currently owns that is available at our data center properties in Atlanta-Metro,Atlanta (DC–2) (which represents the development of a new data center building at our Atlanta (DC-1) campus), Atlanta-Suwanee, Richmond, Irving, Fort Worth, Princeton, Chicago, Ashburn, Phoenix, Hillsboro and Manassas, through our joint venture.Manassas. 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 credit facility, access to joint venture capitaldistributions from our unconsolidated entity and issuance of additional equity (including forward equity transactions) or debt securities, subject to prevailing market conditions, as discussed below. We may also sell an interest in certain projects into unconsolidated entities as another source of capital.
6563
Equity Capital
On March 15, 2018,In June 2019, we issued 4,280,000 sharesestablished 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 7.125% Seriesour Class A Cumulative Redeemable Perpetual Preferred Stock with a liquidation preference of $25.00common stock, $0.01 par value per share (the “Class A common stock”) which included 280,000could include shares to be sold on a forward basis. The use of forward sales under the underwriters’ partial exercisePrior ATM Program generally allows the Company to lock in a price on the sale of their option to purchase additional shares. We usedshares when sold by the forward sellers, but defer receiving the net proceeds of approximately $103.2 million to repay amounts outstanding under our unsecured revolving credit facility.
On June 25, 2018, wefrom such sales until the shares are issued 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual Preferred Stock withat settlement on a liquidation preference of $100.00 per share, which included 412,500 shares the underwriters purchased pursuant to the exercise of their overallotment option in full. We used the net proceeds of approximately $304 million to repay amounts outstanding under our unsecured revolving credit facility.later date.
In February 2019, we conducted an underwritten offering of 7,762,500 shares of Class A common stock, consisting of 4,000,000 shares issued during the first quarter of 2019 and 3,762,500 shares which will be issued on a forward basis, which included 1,012,500 shares of the underwriters full exercise of their option to purchase additional shares, in each case at a price of $41.50 per share. We received net proceeds of approximately $159 million from the issuance of 4,000,000 shares during the first quarter, which were used to repay amounts outstanding under our unsecured revolving credit facility. We expect to physically settle the forward sale (by the delivery of shares of common stock) and receive proceeds of approximately $147 million from the sale of the 3,762,500 shares of common stock which we expect to occur by March 1,May 2020, although we have the right to elect settlement prior to that time.
In June 2019, we established a new “at-the-market” equity offering program (the “ATM Program”) pursuant to which we may issue, from time to time, up to $400$500 million of our Class A common stock, which may include shares to be issuedsold on a forward basis. We issued no sharesAs under the Prior ATM Program, the use of forward sales under the ATM Program duringgenerally allows the threeCompany 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.
During the six months ended June 30, 2019.
Previously, in March 2017, the Company established an “at-the-market” equity offering program (the “prior ATM Program”) pursuant to which the Company could issue, from time to time, up to $3002020, we received $134.5 million of its Class A common stock. The Company issued nonet proceeds from the settlement of forward shares underas noted in the prior ATM Programtable below. In addition, during the threesix months ended June 30, 2019.2020, we utilized the forward provisions under the ATM Program to allow for the sale of additional shares of our common stock as noted in the table below. We expect to physically settle (by delivering shares of common stock) the remaining forward sales under the Prior ATM Program and ATM Program prior to the first anniversary date of each respective transaction.
In June 2020, QTS conducted an underwritten offering of 4,400,000 shares of common stock offered on a forward basis at a price of $64.90 per share representing available proceeds upon physical settlement of approximately $271.9 million as of June 30, 2020. The Company terminatedexpects to physically settle the forward sale agreements (by the delivery of shares of common stock) and receive proceeds, subject to certain adjustments, from the sale of those shares of common stock by June 30, 2021, although the Company has the right to elect settlement prior to that time.
The following table represents a summary of our equity issuances during the six months ended June 30, 2020 (unaudited and in thousands):
| | | | | | |
Offering Program |
| Forward | | | | Net Proceeds Available/(Received) (1) |
Shares and net proceeds available as of December 31, 2019 | | 3,795 | | | $ | 177,845 |
February 2019 Offering - Settlement | | (931) | (2) | | | (35,841) |
June 2019 Prior ATM Program - Settlements | | (1,000) | (2) | | | (47,490) |
June 2019 Prior ATM Program - Sales | | 3,917 | | | | 209,934 |
Shares and net proceeds available as of March 31, 2020 | | 5,781 | | | $ | 304,448 |
June 2019 Prior ATM Program - Sales | | 634 | | | | 33,643 |
June 2019 Prior ATM Program - Settlements | | (1,033) | (2) | | | (51,162) |
May 2020 ATM Program - Sales | | 517 | | | | 31,690 |
June 2020 Offering - Sales | | 4,400 | | | | 271,938 |
Shares and net proceeds available as of June 30, 2020 | | 10,299 | | | $ | 590,557 |
(1) | Net Proceeds Available remain subject to certain adjustments until settled. |
(2) | Represents the number of forward shares we elected to physically settle during the six months ended June 30, 2020. |
As shown in the table above, we currently have access to approximately $591 million of net proceeds through forward stock sales (subject to further adjustment as described below). We view forward equity sales as an important capital raising tool that we expect to continue to strategically and selectively use, subject to market conditions and overall availability under the ATM programProgram.
At any time during the term of any forward sale, we may settle the forward sale by physical delivery of shares of common stock to the forward purchaser or, at our election, cash settle or net share settle. The initial forward sale price per share under each forward sale equals the product of (x) an amount equal to 100% minus the applicable forward selling commission and (y) the volume weighted average price per share at which the borrowed shares of our common stock were sold pursuant to the equity distribution agreement by the relevant forward sellers during the applicable forward hedge selling period for such shares to hedge the relevant forward purchasers’ exposure under such forward sale.
64
Thereafter, the forward sale price is subject to adjustment on a daily basis based on a floating interest rate factor equal to the specified daily rate less a spread, and is decreased based on specified amounts related to dividends on shares of our common stock during the term of the applicable forward sale. If the specified daily rate is less than the spread on any day, the interest rate factor will result in March 2019 in connection witha daily reduction of the expiration of its prior universal shelf registration statement.applicable forward sale price.
Manassas Joint VentureUnconsolidated Entity
On February 22, 2019, we entered into a joint venturean agreement with Alinda Capital Partners (“Alinda”), a premieran infrastructure investment firm, with respect to our Manassas data center, as described above under “Factors That May Influence Future Results of Operations and Cash Flows.” At the closing, we received approximately $53 million in proceeds, which was comprised of the cash contributed by Alinda and also borrowings under a $164.5 million secured credit facility entered into by the joint ventureunconsolidated entity at closing that carries a rate of LIBOR plus 2.00% to 2.25%. depending on the existing leverage ratio. We used these proceeds to pay down our revolving credit facility and for general corporate purposes. Under the joint venture agreement, we will receive additional proceeds in the future as and when we complete development of each phase of the Manassas data center and place it into service, which allows us to receive proceeds for Alinda’s share of the joint ventureunconsolidated 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 venture.agreement.
Cash
As of June 30, 2019, we had $10.6 million of unrestricted2020, our cash and cash equivalents.equivalents balance was $16.5 million. As of March 31, 2020, resulting from heightened volatility in the capital markets, we increased our cash and cash equivalents balance to approximately $172.0 million, primarily through settlement of the aforementioned forward equity sales and draws on our unsecured revolving credit facility, which was considerably greater than historical levels. In April 2020, we reduced our cash position more in line with historical cash balances by using a portion of cash on hand to repay a portion of our unsecured revolving credit facility, pay dividends to common and preferred stockholders and fund additional capital expenditures.
66Dividends and Distributions
The following tables present quarterly cash dividends and distributions paid to QTS’ common and preferred stockholders and the Operating Partnership’s unit holders for the six months ended June 30, 20192020 and 2018:2019:
| | | | | | | | | | | | | | | | |
Six Months Ended June 30, 2019 | ||||||||||||||||
Six Months Ended June 30, 2020 | Six Months Ended June 30, 2020 | |||||||||||||||
|
| |
| |
| Aggregate |
| |
| |
| Aggregate | ||||
| | | | Per Share and | | Dividend/Distribution | | | | Per Share and | | Dividend/Distribution | ||||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||||
Common Stock/Units | | | | | | | | | | | | | | | | |
March 20, 2019 | | April 4, 2019 | | $ | 0.44 | | $ | 27.3 | ||||||||
December 21, 2018 | | January 8, 2019 | | $ | 0.41 | | $ | 23.7 | ||||||||
March 20, 2020 | | April 7, 2020 | | $ | 0.47 | | $ | 31.5 | ||||||||
December 20, 2019 | | January 7, 2020 | | $ | 0.44 | | | 28.6 | ||||||||
| | | | | | | $ | 51.0 | | | | | | | $ | 60.1 |
| | | | | | | | | | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 0.45 | | $ | 1.9 | ||||||||
December 31, 2018 | | January 15, 2019 | | $ | 0.45 | | $ | 1.9 | ||||||||
March 31, 2020 | | April 15, 2020 | | $ | 0.45 | | $ | 1.9 | ||||||||
December 31, 2019 | | January 15, 2020 | | $ | 0.45 | | | 1.9 | ||||||||
| | | | | | | $ | 3.8 | | | | | | | $ | 3.8 |
| | | | | | | | | | | | | | | | |
Series B Preferred Stock/Units | | | | | | | | | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 1.63 | | $ | 5.1 | ||||||||
December 31, 2018 | | January 15, 2019 | | $ | 1.63 | | $ | 5.1 | ||||||||
March 31, 2020 | | April 15, 2020 | | $ | 1.63 | | $ | 5.1 | ||||||||
December 31, 2019 | | January 15, 2020 | | $ | 1.63 | | | 5.1 | ||||||||
| | | | | | | $ | 10.3 | | | | | | | $ | 10.2 |
| | | | | | | | |
Six Months Ended June 30, 2018 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Common Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
March 22, 2018 | | April 5, 2018 | | $ | 0.41 | | $ | 23.7 |
December 5, 2017 | | January 5, 2018 | | $ | 0.39 | | $ | 22.2 |
| | | | | | | $ | 45.9 |
| | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | |
April 5, 2018 | | April 16, 2018 | | $ | 0.15 | | $ | 0.6 |
| | | | | | | $ | 0.6 |
65
| | | | | | | | |
Six Months Ended June 30, 2019 | ||||||||
|
| |
| |
| Aggregate | ||
| | | | Per Share and | | Dividend/Distribution | ||
Record Date | | Payment Date | | Per Unit Rate | | Amount (in millions) | ||
Common Stock/Units | | | | | | | | |
March 20, 2019 | | April 4, 2019 | | $ | 0.44 | | $ | 27.3 |
December 21, 2018 | | January 8, 2019 | | $ | 0.41 | | | 23.7 |
| | | | | | | $ | 51.0 |
| | | | | | | | |
Series A Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 0.45 | | $ | 1.9 |
December 31, 2018 | | January 15, 2019 | | $ | 0.45 | | | 1.9 |
| | | | | | | $ | 3.8 |
| | | | | | | | |
Series B Preferred Stock/Units | | | | | | | | |
March 31, 2019 | | April 15, 2019 | | $ | 1.63 | | $ | 5.1 |
December 31, 2018 | | January 15, 2019 | | $ | 1.63 | | | 5.1 |
| | | | | | | $ | 10.3 |
Additionally, subsequent to June 30, 2019,2020, we paid the following dividends:
● | On July |
● | On July 15, |
● | On July 15, |
67
Indebtedness
As of June 30, 2019,2020, we had approximately $1,403.9$1,653.4 million of indebtedness, including financingfinance lease obligations.
Unsecured Credit Facility. In November 2018, we amended ourWe amended and restated our unsecured credit facility byin October 2019 (as so amended and restated, the “unsecured credit facility”), which among other things, extendingincreased the total potential borrowings, extended maturity dates, lowered interest rates, and provided for an additional term modifying or eliminating certain covenants and reduced pricing by 20 basis points.loan under the agreement. The unsecured credit facility includes a $350$225 million term loan which matures on December 17, 2023,2024 (“Term Loan A”), a $350$225 million term loan which matures on April 27, 2024,2025 (“Term Loan B”), an additional term loan of $250 million which matures on October 18, 2026 (“Term Loan C”) and an $820 milliona $1.0 billion revolving credit facility which matures on December 17, 2022, with2023. The revolving portion of the credit facility has a one yearone-year extension option.option available to the Company. Amounts outstanding under the amendednew unsecured credit facility bear interest at a variable rate equal to, at our election, LIBOR or a base rate, plus a spread that will vary depending upon our leverage ratio. For revolving credit loans, the spread ranges from 1.35%1.25% to 1.95%1.85% for LIBOR loans and 0.35%0.25% to 0.95%0.85% for base rate loans. For term loans,Term Loan A and Term Loan B, the spread ranges from 1.30%1.20% to 1.90%1.80% for LIBOR loans and 0.30%0.20% to 0.90%0.80% for base rate loans. For Term Loan C the spread ranges from 1.50% to 1.85% for LIBOR loans and 0.50% to 0.85% for base rate loans. The new unsecured credit facility also provides for borrowing capacity of up to $200$300 million in various foreign currencies, and a $500 million accordion feature, subject to obtaining additional loan commitments.currencies.
66
Under the new unsecured credit facility, the capacity may be increased from the current capacity of $1.52$1.7 billion to $2.02$2.2 billion subject to certain conditions set forth in the credit agreement, including the consent of the administrative agent and obtaining necessary commitments. We are also required to pay a commitment fee to the lenders assessed on the unused portion of the revolving portion of the new unsecured revolving credit facility. At our election, we can prepay amounts outstanding under the new unsecured credit facility, in whole or in part, without penalty or premium.
Our ability to borrow under the amendednew unsecured credit facility is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations on liens, mergers, consolidations, investments, distributions, asset sales and affiliate transactions, as well as the following financial covenants: (i) the Operating Partnership's and its subsidiaries' consolidated total unsecured debt plus any capitalized lease obligations with respect to the unencumbered asset pool properties may not exceed 60% of the unencumbered asset pool value (or 65% of the unencumbered asset pool value for up to four consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent;Agent, provided the four fiscal quarter period includes the quarter in which the material acquisition was consummated); (ii) the unencumbered asset pool debt yield cannot be less than 12% (or 11.5% for the four consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the four fiscal quarter period includes the quarter in which the material acquisition was consummated)10.5%; (iii) QTS must maintain a minimum fixed charge coverage ratio (defined as the ratio of consolidated EBITDA, subject to certain adjustments, to consolidated fixed charges) for the prior two most recently-ended calendar quarters of 1.50 to 1.00; (iv) QTS must maintain a maximum debt to gross asset value (as defined in the amended and restated credit agreement) ratio of 60% (or 65% for the four consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent;Agent, provided the four fiscal quarter period includes the quarter in which the material acquisition was consummated); and (v) QTS must maintain tangible net worth (as defined in the amended and restated credit agreement) which cannot be less than the sum of $1,567,000,000$1,686,000,000 plus 75% of the net proceeds from any equity offerings subsequent equity offerings.to June 30, 2019.
The availability under the new revolving credit facility is the lesser of (i) $820 million,$1.0 billion, (ii) 60% of the unencumbered asset pool capitalized value (or 65% of the unencumbered asset pool capitalized value for the four consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent;Agent, provided the four fiscal quarter period includes the quarter in which the material acquisition was consummated) and (iii) the amount resulting in an unencumbered asset pool debt yield of 12% (or 11.5% for the four consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the four fiscal quarter period includes the quarter in which the material acquisition was consummated)10.5%. In the case of clauses (ii) and (iii) of the preceding sentence, the amount available under the revolving credit facility is adjusted to take into account any other unsecured debt and certain capitalized leases. A material acquisition is an acquisition of properties or assets with a gross purchase price equal to or in excess of 15% of the Operating Partnership’s gross asset value (as defined in the amended and restated credit agreement) as of the end of the most recently ended quarter for which financial statements are publicly available. The availability of funds under our new unsecured credit facility depends on compliance with our covenants.
68
Table The current availability under the unsecured credit facility was $488.7 million as of ContentsJune 30, 2020.
As of June 30, 2019,2020, we had outstanding $956$1,207.9 million of indebtedness under the unsecured credit facility, consisting of $255.6$507.9 million of outstanding borrowings under ourthe unsecured revolving credit facility and $700.0 million outstanding under the term loans, exclusive of net debt issuance costs of $5.8$5.9 million. In connection with the unsecured credit facility, as of June 30, 2019,2020, we had additional letters of credit outstanding aggregating to $4.1$3.5 million.
As of June 30, 2019, the weighted average interest rate for amounts outstanding under the unsecured credit facility, was 3.47%.
On April 5, 2017,2020, we entered into forwardhad interest rate swap agreements in place with an aggregate notional amount of $400$700 million. The forward swap agreements effectively fix the interest rate on $400$700 million of term loan borrowings, $200$225 million of swaps allocated to each term loan, from January 2, 2018 through December 17, 2021 and April 27, 2022, respectively. The weighted average effective fixed interest rate on the $400Term Loan A, $225 million notional amount of term loan financing approximates 3.3%, which commenced on January 2, 2018 and assumes the current LIBOR spread of 1.3%.
On December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from December 17, 2021Term Loan B and April 27, 2022$250 million allocated to Term Loan C, through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the execution of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, we entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.loans.
4.750% Senior Notes due 2025. On November 8, 2017, the Operating Partnership and QTS Finance Corporation, a subsidiary of the Operating Partnership initially formed solely for the purpose of facilitating the offering of the 5.875% Senior Notes due 2022 (collectively, the “Issuers”), issued $400 million aggregate principal amount of 4.75%4.750% Senior Notes due November 15, 2025 (the “Senior Notes”) in a private offering. The Senior Notes have an interest rate of 4.750% per annum and were issued at a price equal to 100% of their face value. The net proceeds from the offering were used to fund the redemption of and satisfy and discharge the indenture pursuant to which the Issuers issued the 5.875% Senior Notes due 2022 and to repay a portion of the amount outstanding under the Company’s unsecured revolving credit facility.
67
The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Operating Partnership’s existing subsidiaries (other than certain foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS, the Issuers or any other subsidiary guarantor. QTS Realty Trust, Inc. does not guarantee the Senior Notes and will not be required to guarantee the Senior Notes expectexcept under certain circumstances. The offering was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended, and the Senior Notes were issued pursuant to an indenture, dated as of November 8, 2017, among QTS, the Issuers, the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (the “Indenture”). As of June 30, 2019,2020, the outstanding net debt issuance costs associated with the Senior Notes were $4.8$4.1 million.
The Indenture contains affirmative and negative covenants that, among other things, limits or restricts the Operating Partnership’s ability and the ability of certain of its subsidiaries (the “Restricted Subsidiaries”) to: incur additional indebtedness; pay dividends; make certain investments or other restricted payments; enter into transactions with affiliates; enter into agreements limiting the ability of the Operating Partnership’s restricted subsidiaries to pay dividends; engage in sales of assets; and engage in mergers, consolidations or sales of substantially all of their assets.
However, certain of these covenants will be suspended if and for so long as the Senior Notes are rated investment grade by specified debt rating services and there is no default under the Indenture. The Operating Partnership and its Restricted
69
Subsidiaries also are required to maintain total unencumbered assets (as defined in the Indenture) of at least 150% of their unsecured debt on a consolidated basis.
The Senior Notes may be redeemed by the Issuers, in whole or in part, at any time prior to November 15, 2020 at a redemption price equal to (i) 100% of the principal amount, plus (ii) accrued and unpaid interest to the redemption date, and (iii) a make-whole premium. On or after November 15, 2020, the Issuers may redeem the Senior Notes, in whole or in part, at a redemption price equal to (i) 103.563% of the principal amount from November 15, 2020 to November 14, 2021, (ii) 102.375% of the principal amount from November 15, 2021 to November 14, 2022, (iii) 101.188% of the principal amount from November 15, 2022 to November 14, 2023 and (iv) 100.000% of the principal amount of the Senior Notes from November 15, 2023 and thereafter, in each case plus accrued and unpaid interest to, but excluding, the redemption date. In addition, at any time prior to November 15, 2020, the Issuers may, subject to certain conditions, redeem up to 40% of the aggregate principal amount of the Senior Notes at 104.750% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings consummated by the Company or the Operating Partnership. Also, upon the occurrence of a change of control of us or the Operating Partnership, holders of the Senior Notes may require the Issuers to repurchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes to be repurchased plus accrued and unpaid interest to the repurchase date.
Lenexa Mortgage. On March 8, 2017, we entered into a $1.9 million mortgage loan secured by our Lenexa facility. This mortgage has a fixed rate of 4.1%, with periodic principal payments due monthly and a balloon payment of $1.6 million in May 2022. As of June 30, 2019,2020, the outstanding balance under the Lenexa mortgage was $1.8$1.7 million.
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.
68
Contractual Obligations
The following table summarizes our contractual obligations as of June 30, 2019,2020 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 |
| 2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total | ||||||||||||||
Operating Leases | | $ | 4,741 | | $ | 9,589 | | $ | 9,818 | | $ | 10,266 | | $ | 10,393 | | $ | 57,225 | | $ | 102,032 | | $ | 4,798 | | $ | 9,818 | | $ | 10,266 | | $ | 10,393 | | $ | 8,317 | | $ | 48,908 | | $ | 92,500 |
Finance Leases | | | 1,296 | | | 2,579 | | | 2,712 | | | 2,958 | | | 3,229 | | | 33,662 | | | 46,436 | | | 1,304 | | | 2,712 | | | 2,958 | | | 3,229 | | | 3,516 | | | 30,146 | | | 43,865 |
Future Principal Payments of Indebtedness | | | 33 | | | 70 | | | 73 | | | 257,244 | | | 350,000 | | | 750,000 | | | 1,357,420 | | | 35 | | | 73 | | | 1,599 | | | 507,854 | | | 225,000 | | | 875,000 | | | 1,609,561 |
Total | | $ | 6,070 | | $ | 12,238 | | $ | 12,603 | | $ | 270,468 | | $ | 363,622 | | $ | 840,887 | | $ | 1,505,888 | | $ | 6,137 | | $ | 12,603 | | $ | 14,823 | | $ | 521,476 | | $ | 236,833 | | $ | 954,054 | | $ | 1,745,926 |
(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 Senior Notes nor the related debt issuance costs on the term loans reflected at June 30, |
Total obligations does not include contractual interest that we are required to pay on our long-term debt obligations. Contractual interest payments on our credit facilities, mortgages, finance leases, and other financing arrangements through the scheduled maturity date, assuming no prepayment of debt and inclusive of the effects of interest rate swaps, are shown below. Interest payments were estimated based on the principal amount of debt outstanding and the applicable interest rate as of June 30, |
| | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | | |
2019 |
| 2020 |
| 2021 |
| 2022 |
| 2023 |
| Thereafter |
| Total | ||||||||||||||||||||||||||
2020 | 2020 |
| 2021 |
| 2022 |
| 2023 |
| 2024 |
| Thereafter |
| Total | |||||||||||||||||||||||||
$ | 37,312 | | $ | 55,891 | | $ | 55,825 | | $ | 57,251 | | $ | 47,364 | | $ | 47,439 | | $ | 301,083 | 26,125 | | $ | 52,162 | | $ | 54,118 | | $ | 53,886 | | $ | 38,186 | | $ | 34,578 | | $ | 259,055 |
70
Off-Balance Sheet Arrangements
On February 22, 2019, we entered into a joint venturean agreement with Alinda Capital Partners (“Alinda”), a premieran infrastructure investment firm, with respect to our Manassas data center, as described above under “Factors That May Influence Future Results of Operations and Cash Flows.” As of June 30, 2019,2020, our pro rata share of mortgage debt of the joint venture,unconsolidated entity, excluding deferred financing costs, was approximately $34.0$43.0 million, all of which is subject to forward interest rate swap agreements. See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional information on ourthe Company’s interest rate swaps.
In addition, in February 2019, we conducted an underwritten offering of 7,762,500 shares of Class AThe Company has various forward equity contracts, described above, that provide for the ability to raise capital and issue common stock consistingat varying prices and future dates. As of 4,000,000 shares issued duringJune 30, 2020, the first quarterCompany currently has access to approximately $591 million of 2019net proceeds through forward stock sales (subject to further adjustment as described above under the heading “Equity Capital”). The Company views forward equity sales as an important capital raising tool that it expects to continue to strategically and 3,762,500 shares which will be issued on aselectively use, subject to market conditions and overall availability under the Prior ATM Program and the ATM Program. See the section above titled “Equity Capital” for additional information related to our forward basis, in each case at a price of $41.50 per share. We expect to physically settle the forward sale (by the delivery of shares of common stock) and receive proceeds of approximately $147 million from the sale of the 3,762,500 shares of common stock which we expect to occur by March 1, 2020, although we have the right to elect settlement prior to that time.sales.
Cash Flows
Cash flow for the six months ended June 30, 20192020 compared to the six months ended June 30, 20182019 are summarized below (unaudited and in thousands):
| | | | | | | | | | | | |
| | Six Months Ended | | Six Months Ended | ||||||||
| | June 30, | | June 30, | ||||||||
| | 2019 | | 2018 | | 2020 | | 2019 | ||||
Cash flow provided by (used for): | | | | | | | | | | | | |
Operating activities | | $ | 99,431 | | $ | 91,526 | | $ | 133,366 | | $ | 99,431 |
Investing activities | | | (196,915) | | | (271,982) | | | (379,452) | | | (196,915) |
Financing activities | | | 96,353 | | | 224,681 | | | 246,454 | | | 96,353 |
Six Months Ended June 30, 20192020 Compared to Six Months Ended June 30, 20182019
Cash flow provided by operating activities was $133.4 million for the six months ended June 30, 2020 compared to $99.4 million for the six months ended June 30, 2019 compared to $91.5 million for the six months ended June 30, 2018.2019. There was an increase in cash operating income of $20.1$24.0 million
69
from the prior period primarily related to our expansion of certain data centers and leasing activity offset by a decreaseas well as an increase in cash flow associated with net changes in working capital of $12.2$9.9 million primarily related to changes in accounts payable and accrued liabilities and advance rents and other liabilities.
Cash flow used for investing activities decreasedincreased by $75.1$182.5 million to $379.5 million for the six months ended June 30, 2020, compared to $196.9 million for the six months ended June 30, 2019, compared to $272.0 million for the six months ended June 30, 2018.2019. The decreaseincrease was due primarily to additions to property and equipment of $172.2 million as well as cash proceeds of $52.7 million received from the Company’s contribution of assets to a joint venturean unconsolidated entity during the current period as well as a decrease in additions to property and equipment of $43.4 million. These were offset by an increase in cash paid for acquisitions of $19.5 million primarily related to our purchase of the Netherlands facilities in the currentprior period.
Cash flow provided by financing activities decreasedincreased by $128.3$150.1 million to $246.5 million for the six months ended June 30, 2020, compared to $96.4 million for the six months ended June 30, 2019, compared to $224.7 million for the six months ended June 30, 2018.2019. The decreaseincrease was primarily due to $190.4 million of higher net borrowings under the Company’s revolving credit facility during the current period, partially offset by lower net equity issuance proceeds of $249.4$25.0 million as well as higher payments of cash dividends to common and preferred stockholders of $31.6$8.7 million. Offsetting these cash flow decreases was lower net repayments of $134.3 million under our unsecured credit facility.
Critical Accounting Policies
The Company applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the United States. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the consolidated financial statements based on its latest assessment of the current and projected business and general economic environment.
71
Effective January 1, 2019, the Company adopted ASC Topic 842, Leases, which resulted in changes to the Company’s critical accounting policy relating to accounting for lease transactions. Refer to Note 2 – ‘Summary of Significant Accounting Policies’ for additional information regarding the new and updated policies as a result of the adoption of ASC Topic 842.
Additional information regarding the Company’s Critical Accounting Policies and Estimates is included in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 2018.2019.
Inflation
Substantially allA 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.
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.
70
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 such distributions related to allocated taxable income were made to these partners forduring the six months ended June 30, 20192020 and 2018.
2019.
72
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.
As of June 30, 2019,2020, 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 of June 30, 2020, after consideration of interest rate swaps in effect, we had outstanding $555.6$507.9 million of consolidated indebtedness that bore interest at variable rates, which does not take into account $400 millionwas comprised of swaps that take effect December 17, 2021 and April 27, 2022, and the $200 millionrevolving portion of swaps that take effect on January 2, 2020, each as discussed below.the unsecured credit facility.
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 the LIBOR rateinterest rates would increase the interest expensecosts on the $555.6$507.9 million of variable indebtedness outstanding as of June 30, 20192020 by approximately $5.6$5.1 million annually. Conversely, a decrease in the LIBOR rate to 1.40%0.00% would decrease the interest expensecosts on this $555.6$507.9 million of variable indebtedness outstanding by approximately $5.6$0.8 million annually based on the one month LIBOR rate of approximately 2.40%0.16% as of June 30, 2019.2020.
On April 5,In July 2017, the Financial 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, the Federal Reserve Board and the Federal 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. The Company entered intohas contracts consisting of the unsecured credit facility and the forward interest rate swap agreements, documented above, that are indexed to LIBOR and is monitoring and evaluating the related risks, which may include higher interest on loans 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 aggregate notional amount of $400 million. The forward swap agreements effectively fix the interestalternative reference rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from January 2, 2018 through December 17, 2021will be accelerated and April 27, 2022, respectively, at approximately 3.3% assuming the current LIBOR spread of 1.3%.
In addition, on December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from December 17, 2021 and April 27, 2022 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the commencement of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, the Company entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.magnified.
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.
7371
ITEM 4. Controls and Procedures
QTS Realty Trust, Inc.
Disclosure Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended June 30, 2019,2020, 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 in Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in QTS’ internal control over financial reporting during the period ended June 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, QTS’ internal control over financial reporting.
QualityTech, LP
Disclosure Controls and Procedures
Based on an evaluation of disclosure controls and procedures for the period ended June 30, 2019,2020, conducted by the Company’sOperating Partnership’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer concluded that the Operating Partnership’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’sOperating Partnership’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 in Securities and Exchange Commission rules and forms.
Changes in Internal Control over Financial Reporting
There were no changes in the Operating Partnership’sQTS’ internal control over financial reporting during the period ended June 30, 2019,2020, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’sQTS’ internal control over financial reporting.
.
7472
PART II. OTHER INFORMATION
ITEM 1. Legal Proceedings
In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on us.
ITEM 1A. Risk Factors
ThereExcept as set forth below, as of the date of this report, there have been no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2018,2019, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2019,28, 2020, which are accessible on the SEC’s website at www.sec.gov.
Our business may be adversely affected by the recent coronavirus (COVID-19) pandemic or by future outbreaks of highly infectious or contagious diseases or other public health crises.
The novel coronavirus (COVID-19) pandemic is causing significant disruptions to the United States and global economy and has contributed to significant volatility and negative pressure in financial markets. The global impact of the outbreak is rapidly evolving and, as cases of the virus have continued to be identified in additional countries, many countries, including the United States, have reacted by instituting quarantines, restrictions on travel and mandatory closures of businesses. The COVID-19 pandemic or any other future outbreaks of highly infectious or contagious diseases or other public health crises, and any preventative or protective actions that we or others may take in response thereto, may result in business and/or operational disruption for us and/or our customers, suppliers, contractors, capital sources and other business partners. For example, our customers’ businesses have been and may continue to be disrupted due to the COVID-19 pandemic, which has affected their ability to make rental payments to us, and if this were to continue to occur, our revenues could be negatively affected. Furthermore, the COVID-19 pandemic has and may continue to, and other global economic disrupters could, negatively impact our supply chain, increase the costs of development and cause delays in the construction or development of our data centers due to delays in the ability to obtain permits, disruptions in the availability of contractors, disruptions in the supply of materials or products or the inability of our contractors to perform on a timely basis or at all, and it may not be possible to find replacement products or supplies. Any such disruptions or delays such could adversely affect our business and growth.
Additional factors that could negatively impact our ability to successfully operate during or following the COVID-19 pandemic or similar public health crises, or that could otherwise significantly adversely impact and disrupt our business, financial condition and results of operations, include, but are not limited to, the risk of unanticipated operating costs and expenses related to measures taken to ensure health and safety and business continuity; difficulty in accessing debt and equity capital on attractive terms, or at all, or a severe disruption and instability in the global financial markets or deteriorations in credit and financing conditions, which could affect our access to capital necessary to fund our operations and liquidity needs; the increased risk of cyber incidents and disruptions to our internal control procedures due to increased teleworking and state and local stay-at-home orders, and the processes, procedures and controls that we have implemented to help mitigate cyber risks may not be sufficient or that our internal control procedures may experience challenges or delays; the continued service and availability of personnel, including our executive officers and other leaders who are part of our management team and our ability to recruit, attract and retain skilled personnel to the extent our management or personnel are impacted in significant numbers or in other significant ways by the outbreak of pandemic or epidemic disease and are not available or allowed to conduct work; the risk of asset impairments due to future changes in expectations for sales, earnings and cash flows related to fixed assets, intangible assets and goodwill; and increased susceptibility to litigation related to, among other things, the financial impacts of COVID-19 on our business.
Any of the foregoing risks and developments, as well as others, could have a material adverse effect on our business, financial condition and results of operations. The extent to which the COVID-19 pandemic impacts our business and operations remains largely uncertain and will depend on future developments that are highly uncertain and cannot be predicted with confidence, including the duration and scope of the pandemic, new information that may emerge concerning the severity of COVID-19, the response of the overall economy and financial markets and the actions taken to contain COVID-19 or treat its impact, such as government actions, laws or orders or any changes or amendments
73
thereto and the success of any lifting or easing of, or the risk of any premature lifting or easing of, any such restrictions, among others. The COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial performance, and results of operations and may also 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, 2019.
ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds
Unregistered Sales of Equity Securities
QTS did not sell any securities during the six months ended June 30, 20192020 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).
QTS from time to time issues shares of Class A common stock, including pursuant to the QTS Realty Trust, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”) upon exercise of stock options issued and grant of restricted stock under the 2013 Equity Incentive Plan, and upon redemption of Class A units of limited partnership of the Operating Partnership (either through Class A units previously held or those received from conversion of Class O units from the QualityTech, LP 2010 Equity Incentive Plan). Pursuant to the partnership agreement of the Operating Partnership, each time QTS issues shares of common stock, the Operating Partnership issues to QTS, its general partner, an equal number of Class A units. The units issued to QTS are not registered under the Securities Act in reliance on Section 4(a)(2) of the Securities Act due to the fact that Class A units were issued only to QTS and therefore, did not involve a public offering. During the six months ended June 30, 2019,2020, the Operating Partnership issued approximately 120,00028,000 Class A units to QTS in connection with Class A unit redemptions and stock option exercises and issuances pursuant to the 2013 Equity Incentive Plan, with a value aggregating approximately $5.3$1.5 million based on the respective dates of the redemptions and option exercises, as applicable.
In addition, on March 1, 2019, During the six months ended June 30, 2020 the Operating Partnership issued 4,000,000approximately 1.0 million Class A units to QTS in connectionrelated to the settlement of a portion of the shares subject to forward sale agreements under the Prior ATM Program, with QTS’s underwritten offeringan aggregate value of 7,762,500 sharesapproximately $51.2 million, net of Class A common stock, consisting of 4,000,000 sharesequity issuance costs. In addition, during the six months ended June 30, 2020 the Operating Partnership issued by QTS on March 1, 2019 and 3,762,500 shares which will be issued on a forward basis prior to March 1, 2020 (and in connection with which 3,762,500approximately 0.9 million Class A units will beto QTS related to the settlement of the remaining shares subject to forward sale agreements under the February 2019 Offering, with an aggregate value of approximately $35.8 million, net of equity issuance costs.
The Operating Partnership also issues Class A units upon the conversion of Class O units of the Operating Partnership. During the six months ended June 30, 2020, the Operating Partnership issued less than 0.1 million Class A units to QTS).holders of Class O units. These Class A units issued to QTSwere not registered under the Securities Act in reliance on Section 4(a)(2) of the Securities Act due to the fact that Class A units were issued only to QTSthe respective holders of Class O units at the time of conversion and therefore, did not involve a public offering.
7574
Repurchases of Equity Securities
During the three months ended June 30, 2019,2020, certain of our employees surrendered Class A common stock owned by them to satisfy their federal and state tax obligations in connection with the vesting of restricted common stock under the 2013 Equity Incentive Plan.
The following table summarizes all of these repurchases during the three months ended June 30, 2019:2020:
| | | | | | | | | | | | | | | | | | |
|
| |
| |
| Total number of |
| |
| |
| |
| Total number of |
| | ||
| | | | | | shares purchased as | | Maximum number of | | | | | | shares purchased as | | Maximum number of | ||
| | Total number | | Average price | | part of publicly | | shares that may yet be | | Total number | | Average price | | part of publicly | | shares that may yet be | ||
| | of shares | | paid per | | announced plans or | | purchased under the | | of shares | | paid per | | announced plans or | | purchased under the | ||
Period | | purchased (1) | | share | | programs | | plans or programs | | purchased (1) | | share | | programs | | plans or programs | ||
April 1, 2019 through April 30, 2019 | | 2,303 | | $ | 45.42 | | N/A | | N/A | |||||||||
May 1, 2019 through May 31, 2019 | | — | | | — | | N/A | | N/A | |||||||||
June 1, 2019 through June 30, 2019 | | 8,415 | | | 43.28 | | N/A | | N/A | |||||||||
April 1, 2020 through April 30, 2020 | | 1,674 | | $ | 54.90 | | N/A | | N/A | |||||||||
May 1, 2020 through May 31, 2020 | | — | | | — | | N/A | | N/A | |||||||||
June 1, 2020 through June 30, 2020 | | 14,705 | | | 64.09 | | N/A | | N/A | |||||||||
Total | | 10,718 | | $ | 43.74 | | | | | | 16,379 | | $ | 63.15 | | | | |
(1) | The number of shares purchased represents shares of Class A common stock surrendered by certain of our employees to satisfy their federal and state tax obligations associated with the vesting of restricted common stock. With respect to these shares, the price paid per share is based on the closing price of our Class A common stock as of the date of the determination of the federal income tax. |
ITEM 3. Defaults Upon Senior Securities
None.
ITEM 4. Mine Safety Disclosures
Not applicable.
ITEM 5. Other Information
None.
ITEM 6. Exhibits
| | |
Exhibit |
| Exhibit Description |
| | |
| | |
3.1 | | |
| | |
3.2 | | |
| | |
3.3 | | |
| | |
3.4 | | |
| | |
7675
3.5 | | |
| | |
3.6 | | |
| | |
3.7 | | |
| | |
4.1 | | |
| | |
4.2 | | |
| | |
4.3 | | Form of 4.750% Senior Notes due 2025 (included as Exhibit A to Exhibit 4.2 hereof) |
| | |
4.4 | | |
| | |
4.5 | | |
| | |
4.6 | | |
| | |
4.7 | |
76
| | |
4.8 | | |
| | |
4.9 | | |
| | |
4.10 | | |
| | |
| | |
| | |
| | |
| | |
77
31.1 | | |
| | |
31.2 | | |
| | |
31.3 | | |
| | |
31.4 | | |
| | |
32.1 | | |
| | |
32.2 | |
77
| | |
101 | | The following materials from QTS Realty Trust, Inc.’s and QualityTech, LP’s Quarterly Report on Form 10-Q for the period ended June 30, |
104
Cover Page Interactive Data File (formatted in iXBRL (inline eXtensible Business Reporting Language) and contained in Exhibit 101).
+ Filed herewith.
† Denotes a management contract or compensatory plan, contract or arrangement.
78
SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
| |
| QTS Realty Trust, Inc. |
| |
DATE: August | /s/ Chad L. Williams |
| Chad L. Williams |
| Chairman and Chief Executive Officer |
| |
| |
DATE: August | /s/ William H. Schafer |
| William H. Schafer |
| Executive Vice President – Finance and Accounting |
| (Principal Accounting Officer) |
| |
| |
DATE: August | /s/ Jeffrey H. Berson |
| Jeffrey H. Berson |
| Chief Financial Officer |
| (Principal Financial Officer) |
| |
| QualityTech, LP |
| |
| By: QTS Realty Trust, Inc., its general partner |
78
| |
DATE: August | /s/ Chad L. Williams |
| Chad L. Williams |
| Chairman and Chief Executive Officer |
| |
| |
DATE: August | /s/ William H. Schafer |
| William H. Schafer |
| Executive Vice President – Finance and Accounting |
| (Principal Accounting Officer) |
| |
| |
DATE: August | /s/ Jeffrey H. Berson |
| Jeffrey H. Berson |
| Chief Financial Officer |
| (Principal Financial Officer) |
| |
79