QTS Reports Second Quarter 2014 Operating Results

OVERLAND PARK, Kan., July 29, 2014 /PRNewswire/ -- QTS Realty Trust, Inc. ("QTS" or the "Company") (NYSE: QTS) today announced operating results for the second quarter ended June 30, 2014. The Company completed its initial public offering on October 15, 2013, pursuant to which the Company became the general partner of QualityTech, LP (the "Predecessor"). The following financial data for the three and six months ended June 30, 2014, three months ended March 31, 2014, and as of June 30, 2014 and December 31, 2013 is that of the Company. The financial data for the three and six months ended June 30, 2013 is that of the Predecessor.

Second Quarter Highlights

• Reported Operating FFO of $18.4 million in the second quarter of 2014, an increase of 66% compared to the second quarter of 2013. Operating FFO for the second quarter of 2014 on a fully diluted per share basis was $0.50 per share.
• Reported Adjusted EBITDA of $23.3 million in the second quarter of 2014, an increase of 32% compared to the second quarter of 2013.
• Reported NOI of $33.7 million in the second quarter of 2014, an increase of 25% compared to the second quarter of 2013.
• Total revenues of $51.3 million recognized in the second quarter 2014, an increase of 20% compared to the second quarter 2013. Monthly Recurring Revenue (MRR) as of June 30, 2014 increased by 26% to $16.0 million compared to MRR as of June 30, 2013.
• Executed new and modified leases aggregating to a net increase of $17.7 million in incremental annualized rent, net of downgrades which brought the Company's booked-not-billed annualized rent to $41.0 million.  Both the net sales activity and booked-not-billed balances are the highest levels in the Company's history.  This does not include the lease at the acquired New Jersey facility discuss below.
• Acquired McGraw Hill facility in New Jersey and entered into a ten-year lease with Atos on that facility on June 30, 2014.

"We are pleased with the performance for the quarter, which is centered on the success of our fully integrated technology services platform and 3C product offering. Our strong financial growth, along with our market leading return on equity, is evidence that our strategy and premium customer service is being valued by our customers. Our recent transactions are further evidence of our ability to unlock value through enterprise outsourcing opportunities like McGraw Hill Financial, Inc. and Atos. We also demonstrated in Chicago our continued ability to find infrastructure rich assets at a low basis in strategic new markets," said Chad Williams, Chairman and CEO - QTS.

Williams added, "In addition, our stable pricing, along with record leasing activity and signed and committed backlog, gives us strong confidence in our continued future success."

Financial Results

Net income recognized in the second quarter of 2014 was $3.9 million ($0.11 per basic and diluted share) compared to a net loss recognized in the second quarter of 2013 of $1.2 million. QTS generated Operating FFO of $18.4 million in the second quarter of 2014, an increase of approximately 66% compared to $11.1 million for the second quarter of 2013. Additionally, QTS generated $23.3 million of Adjusted EBITDA in the second quarter of 2014, an increase of 32% compared to $17.7 million for the second quarter of 2013. MRR as of June 30, 2014 was $16.0 million, an increase of 26% compared to MRR as of June 30, 2013 of $12.7 million, with total revenues increasing by 20% to $51.3 million for the second quarter 2014 compared to $42.9 million for the second quarter 2013. As discussed in the prior quarter's earnings release, the Company recorded a one-time restructuring charge aggregating to approximately $1.0 million in the second quarter of 2014 (an additional $0.2 million is expected to be incurred in the third quarter of 2014).  Additionally, transaction costs which were primarily related to the New Jersey acquisition aggregating $1.1 million were incurred in the second quarter of 2014.  Both charges were removed when calculating Operating FFO and Adjusted EBITDA.

Leasing Activity

During the second quarter of 2014, QTS entered into customer leases representing approximately $1.5 million of incremental MRR, net of downgrades, (which represents approximately $17.7 million of incremental annualized rent).  Moreover,  the average new custom data center (C1) and colocation (C2)/cloud and managed services (C3) lease rates executed during the quarter are higher than the trailing four quarter rates for each respective product.  Overall second quarter 2014 new/modified blended lease rate of $329 per square foot was lower than the trailing four quarter average due to a considerably higher proportion of C1 business in the quarter driven by both large upgrades and new customer leases at our Dallas-Fort Worth, Atlanta Metro and Richmond facilities. A more detailed analysis of this activity is set forth in the Company's supplemental information.

During the second quarter of 2014, QTS renewed leases with a total annualized rent of $7.5 million at an average rent per square foot of $735, which was 1.0% higher than their annualized rent prior to their respective renewals.  The Company defines renewals as leases for which the customer retains the same amount of space before and after renewal, which facilitates rate comparability. As summarized in more detail in our supplemental information, there is variability in our renewal rates based on the mix of product types renewed, and renewal rates are expected to continue to increase in the low single digits. Rental churn (which is the MRR impact from a customer completely departing the platform in a given period compared to the total MRR at the beginning of the period) for the second quarter of 2014 was 1.9%.

During the second quarter of 2014, QTS commenced customer leases (which includes new customers and also existing customers that renewed their lease term) representing approximately $1.6 million of MRR (and representing approximately $19.2 million of annualized rent) at $584 per square foot. This compares to customer leases representing an aggregate trailing four quarter average of approximately $1.6 million of MRR (representing approximately $19.2 million of annualized rent) at $365 per square foot. The difference in these commencements on a per square foot basis is largely due to the timing and magnitude of C1 lease commencements relative to C2/C3 lease commencements. A more detailed analysis of this activity is set forth in the Company's supplemental information.

As of June 30, 2014, the booked-not-billed MRR balance (which represents customer leases that have been executed, but for which lease payments have not commenced as of June 30, 2014) was approximately $3.4 million, or $41.0 million of annualized rent. Of this booked-not-billed balance, approximately $1.4 million of MRR was attributable to new customers and approximately $2.0 million of MRR was attributable to existing customers. The booked-not-billed balance is expected to contribute an incremental $4.7 million to revenue in 2014 (representing $13.5 million in annualized revenues), an incremental $7.1 million in 2015 (representing $13.6 million in annualized revenues), and an incremental $13.9 million in annualized revenues thereafter.

Development, Redevelopment, and Acquisitions

During the second quarter of 2014, the Company brought online approximately 45,000 net rentable square feet (NRSF) of raised floor at an aggregate cost of approximately $50 million.  In addition, during the second quarter of 2014 the Company continued redevelopment of the Dallas-Fort Worth, Atlanta – Metro, Richmond, Atlanta – Suwanee and Sacramento facilities.  Over 80,000 net rentable square feet of space related to these redevelopment projects is expected to be ready for its intended use in the third and fourth quarters of 2014.

On June 30, 2014 QTS completed the acquisition of a data center facility in New Jersey (the "New Jersey facility"), from McGraw Hill Financial, Inc., for an aggregate cost of approximately $75 million. This facility is located on approximately 194 acres and consists of approximately 560,000 gross square feet, including approximately 58,000 square feet of raised floor, and 12 MW of gross power. The facility has the capacity to more than double its raised floor square footage and gross power by adding 100,000 raised square feet and up to 20 MW, respectively. The property on which the facility is located contains a 50-acre, 14.1 MW solar field.

Concurrently with this acquisition, QTS entered into a triple net 10-year lease plus a 15-year extension option with  Atos, a leading international information technology services company headquartered in Bezos, France. This lease is expected to generate a 10+% return on invested capital in the New Jersey facility.  Under this arrangement, QTS will provide Atos with its custom data center (C1) offering as well as its new QTS Critical Facilities Management service (CFM), which leverages QTS' expertise in data center management and services to run data center facilities for enterprise customers. Atos will package QTS' C1 and CFM services with their own comprehensive IT outsourcing service offering for McGraw Hill Financial, who will continue to locate its data center needs in the New Jersey facility.

On July 8, 2014, QTS completed the acquisition of the former Sun Times Press facility in downtown Chicago, Illinois, for approximately $18 million. The facility currently contains approximately 317,000 gross square feet with capacity for approximately 134,000 square feet of raised floor and 24 MW of power. QTS intends to redevelop the facility which will increase its size to approximately 400,000 gross square feet with raised floor capacity of approximately 215,000 square feet and 37 MW of power. The facility also has access to long-haul fiber and is situated on 30 acres of land that can be developed.

Balance Sheet and Liquidity

As of June 30, 2014, QTS' total debt balance was $531.2 million, resulting in a debt to annualized adjusted EBITDA of 5.7x.  The debt balance includes the acquisition of the New Jersey facility of $75 million on June 30, 2014, however, adjusted EBITDA does not reflect the EBITDA impact associated with the acquisition. Assuming a projected $8 million of annualized adjusted EBITDA associated with the New Jersey acquisition and also adding the estimated total debt associated with the acquisition of the Chicago facility of $18 million, the resulting  debt to adjusted EBITDA would be 5.4x.

On June 30, 2014, the Company entered into an amendment to the Richmond Credit Agreement dated as of December 21, 2012. The Credit Agreement amendment extended the maturity from December 18, 2015 to June 30, 2019 and reduced the total revolving credit commitments from $100 million to $80 million, but included an accordion feature that allows the Company to increase the size of the credit facility up to $200 million.  The amendment to the Richmond Credit Agreement also provided for a decrease in the interest rate for LIBOR loans from a margin rate ranging from 4.00% to 4.50% to a margin rate ranging from 2.10% to 2.85%, with the rate determined by the overall leverage ratio as defined in the agreement.

On July 23, 2014, the Company closed on its offering of $300 million of unsecured 5.875% Senior Notes due 2022 ("the Notes").  The Notes have an interest rate of 5.875% per annum and were issued at a price equal to 99.211% of their face value.  The proceeds from the offering were used to repay amounts outstanding under the unsecured credit facility, including $75 million outstanding under the unsecured term loan, with the remaining proceeds being used to repay a portion of amounts outstanding under the unsecured revolving credit facility.  The Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by certain of our subsidiaries. The Notes have not been registered under the Securities Act of 1933, as amended (the "Securities Act"), or applicable state securities laws and may not be offered or sold in the United States absent registration or an applicable exemption from the registration requirements of the Securities Act and applicable state laws.

In addition to the Notes discussed above, the Company has received an aggregate of $50 million of additional loan commitments.  $40 million of those commitments are related to the Richmond Credit Facility and $10 million on the Unsecured Revolving Credit facility, all of which are scheduled to close in the third quarter of 2014.

Taking into account the $300 million Senior Notes that were issued and the additional $50 million of loan commitments and adjusting for the approximately $18 million paid for the Chicago facility, the Company's pro forma liquidity at June 30, 2014 was approximately $450 million (which includes cash and cash equivalents and capacity under the respective credit facilities).

2014 Guidance

QTS is revising its 2014 guidance for Adjusted EBITDA to a range of $97.0 million to $101.0 million.  This increase is due to improved core performance and ramping of the New Jersey lease with Atos.  QTS is maintaining its 2014 guidance of Operating FFO in the range of $73.0 million to $77.0 million, or Operating FFO per share of $1.95 to $2.05 as the aforementioned increase from improved core performance and the lease with Atos will be offset by incremental interest expense from the transactions QTS has undertaken to fix its interest rates, extend maturities and improve liquidity. QTS is revising its 2014 guidance on development Capital Expenditures to approximate $200 million, largely due to accelerating the build-out of the Dallas-Fort Worth facility.   

This guidance is calculated based on core revenue growth, excluding acquisitions, in the mid to high teens (which ramp during the year), annual rental churn of 5-8%, and does not contemplate any additional acquisitions, dispositions or financing activities other than those which have already been disclosed.

Non-GAAP Financial Measures

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

Conference Call Details

The Company will host a conference call July 30, 2014, at 10:00 a.m., Eastern time (9:00 a.m. Central time) to discuss its financial results, current business trends and market conditions.

The dial-in number for the conference call is (877) 883-0383 (U.S.) or (412) 902-6506 (International).    The participant entry number is 8494974# and callers are asked to dial in ten minutes prior to start time.  A link to the live broadcast, earnings presentation and the replay will be available on the Company's website (www.qtsdatacenters.com) under the Investors tab. - See more at: http://investors.qualitytech.com/upcoming-webcasts

About QTS

QTS Realty Trust, Inc. (NYSE:QTS) is a leading owner, developer and operator of state-of-the-art, carrier-neutral, multi-tenant data centers. The Company's data centers are facilities that house the network and computer equipment of multiple customers and provide access to a range of communications carriers. The Company has a fully integrated platform through which it owns and operates its data centers and provides a broad range of information technology infrastructure solutions. The Company believes that it owns and operates one of the largest portfolios of multi-tenant data centers in the United States, as measured by gross square footage, and has the capacity to more than double its leased raised floor square footage without constructing any new buildings. The Company's portfolio is currently leased to over 800 customers comprised of companies of all sizes representing an array of industries

QTS Investor Relations Contact

Jeff Berson – Chief Investment Officer
William Schafer – Chief Financial Officer
[email protected]

Forward Looking Statements

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

The forward-looking statements contained in this release reflect the Company's current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause actual results to differ significantly from those expressed in any forward-looking statement. The Company does not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: adverse economic or real estate developments in the Company's markets or the technology industry; national and local economic conditions; difficulties in identifying properties to acquire and completing acquisitions; the Company's failure to successfully develop, redevelop and operate acquired properties and operations; significant increases in construction and development costs; the increasingly competitive environment in which the Company operates; defaults on or non-renewal of leases by customers; increased interest rates and operating costs, including increased energy costs; financing risks, including the Company's  failure to obtain necessary outside financing; decreased rental rates or increased vacancy rates; dependence on third parties to provide Internet, telecommunications and network connectivity to the Company's data centers; the Company's failure to qualify and maintain its qualification as a real estate investment trust; environmental uncertainties and risks related to natural disasters; financial market fluctuations; and changes in real estate and zoning laws and increases in real property tax rates.

While forward-looking statements reflect the Company's good faith beliefs, they are not guarantees of future performance. The Company disclaims any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause the Company's future results to differ materially from any forward-looking statements, see the section entitled "Risk Factors" in the Company's Annual Report on Form 10-K for the year ended December 31, 2013.

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SOURCE QTS Realty Trust, Inc.

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