QTS REALTY TRUST, INC. The following discussion and analysis covers the financial condition and results of operations ofQTS Realty Trust, Inc. You should read the following discussion and analysis in conjunction with QTS's and theOperating Partnership's consolidated financial statements and related notes and "Risk Factors" contained elsewhere in this Form 10-K. Some of the information contained in this discussion and analysis or set forth elsewhere in this Form 10-K, including information with respect to our business and growth strategies, our expectations regarding the future performance of our business and the other non-historical statements contained herein are forward-looking statements. See "Special Note Regarding Forward-Looking Statements." This Form 10-K contains stand-alone audited and unaudited financial statements and other financial data for each of QTS and theOperating Partnership . See "Explanatory Note" for an explanation of the few differences between these financial statements in the context of how QTS and theOperating Partnership operate as a consolidated company.
Since the financial data presented in this Item 7 does not contain any
differences between QTS and the
Overview QTS is a leading provider of data center solutions to the world's largest and most sophisticated hyperscale technology companies, enterprises and government agencies. Through our technology-enabled platform, delivered across mega scale data center infrastructure, we offer a comprehensive portfolio of secure and compliant IT solutions. Our data centers are facilities that power and support our customers' IT infrastructure equipment and provide seamless access and connectivity to a range of communications and IT services providers. Across our broad footprint of strategically-located data centers, we provide flexible scalable, and secure IT solutions including data center space, power and cooling, connectivity and value-add managed services for more than 1,200 customers in the financial services, healthcare, retail, government, and technology industries. We build out our data center facilities to accommodate both multi-tenant environments (hybrid colocation) and for executed leases that require significant amounts of space and power (hyperscale), depending on the needs of each facility at that time. We believe that we own and operate one of the largest portfolios of multi-tenant data centers inthe 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 730 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. We operate a portfolio of 24 data centers located throughoutthe United States ,Canada andEurope . Withinthe United States , our data centers are concentrated in the markets which we believe offer the highest growth opportunities. Our data centers are highly specialized, mission-critical facilities utilized by our customers to store, power and cool the server, storage, and networking equipment that support their most critical business systems and processes. We believe that our data centers are best-in-class and engineered to adhere to the highest specifications commercially available to customers, providing fully redundant, high-density power and cooling sufficient to meet the needs of the largest companies and organizations in the world. We have demonstrated a strong operating track record of "five-nines" (99.999%) reliability since QTS' inception. QTS is aMaryland corporation formed onMay 17, 2013 and is the sole general partner and majority owner ofQualityTech, LP , our operating partnership (the "Operating Partnership"). Substantially all of our assets are held by, and our operations are conducted through, theOperating Partnership . QTS' Class A common stock trades on theNew York Stock Exchange under the ticker symbol "QTS."The Operating Partnership is aDelaware limited partnership formed onAugust 5, 2009 and was QTS' historical predecessor prior to QTS's initial public offering onOctober 15, 2013 (the "IPO"), having operated the Company's business until the IPO. As ofDecember 31, 2019 , QTS owned an approximate 89.7% ownership interest in theOperating Partnership .
We believe that QTS has operated and has been organized in conformity with the
requirements for qualification and taxation as a REIT commencing with its
taxable year ended
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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. Our Customer Base Our data center facilities are designed with the flexibility to support a diverse set of solutions and customers. Our customer base is comprised of more than 1,200 different companies of all sizes representing an array of industries, each with unique and varied business models and needs. We serve Fortune 1000 companies as well as small and medium-sized businesses, or SMBs, including financial institutions, healthcare companies, retail companies, government agencies, communications service providers, software companies and global Internet companies.
We have customers that range from large enterprise and technology companies with significant IT expertise and data center requirements, including financial institutions, "Big Four" accounting firms and the world's largest global Internet and cloud companies, to major healthcare, telecommunications and software and web-based companies.
As a result of our diverse customer base, customer concentration in our portfolio is limited. As ofDecember 31, 2019 , only five of our more than 1,200 customers individually accounted for more than 3% of our monthly recurring revenue ("MRR") (as defined below), with the largest customer accounting for approximately 10.9% of our MRR and the next largest customer accounting for
only 5.8% of our MRR. Our Portfolio
We operate 24 data centers located throughoutthe United States ,Canada andEurope , containing an aggregate of approximately 7.2 million gross square feet of space, including approximately 3.2 million "basis-of-design" raised floor square feet (approximately 96.0% of which is wholly owned by us including our data center inSanta 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 ofDecember 31, 2019 , this space included approximately 1.7 million raised floor operating net rentable square feet, or NRSF, plus approximately 1.6 million square feet of additional raised floor in our development pipeline, of which approximately 167,000 raised floor square feet is expected to become operational byDecember 31, 2020 . Of the total 167,000 raised floor square feet in our development pipeline that is expected to become operational byDecember 31, 2020 , approximately 142,000 square feet was related to customer leases which had been executed as ofDecember 31, 2019 but not yet commenced. Our facilities collectively have access to approximately 894 megawatts ("MW") of available utility power. Access to power 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. 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 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.
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
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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 Accounting
Standards Codification ("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 Item 8
- Note 2 - Summary of Significant Accounting Policies in "Financial Statements
and Supplementary Data" included in this Annual Report.
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 December 31, 2019 , we
had in place customer leases generating revenue for approximately 91% 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. Future economic downturns, regional downturns or downturns in the
technology industry, new technological developments, evolving industry demands
and other similar factors described above under "Risk 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. Negative trends in one or more of these factors
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 December 31, 2019 , 45% of our MRR came from
customers which individually occupied greater than or equal to 6,600 square feet
of space (or approximately 1 MW of power), with the remaining 55% attributable
to customers utilizing less than 6,600 square feet of space. As of December 31,
2019 , approximately 49% 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. 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 December 31, 2019 , the
remaining approximately 51% 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 and customer
downgrades at renewal and renew, lease and re-lease expiring space will impact
our results of operations and cash flows. Leases which have commenced billing
representing approximately 16% and 19% of our total leased raised floor are
scheduled to expire during the years ending December 31, 2020 (including all
month-to-month leases) and 2021, respectively. These leases also represented
approximately 29% and 19%, respectively, of our annualized rent as of December
31, 2019 . 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.
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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 or the issuance of additional equity. We believe that we have
sufficient access to capital from our current cash and cash equivalents, and
borrowings under our credit facilities to fund our development and redevelopment
projects.
Unconsolidated Entity. On February 22, 2019 , we entered into an agreement with
Alinda, an 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 hyperscale data center under development in Manassas, Virginia ), and
Alinda contributed cash, in each case, in exchange for a 50% interest in the
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
unconsolidated entity at closing that carries a rate of LIBOR plus 2.25%. We
used these distributions to pay down our revolving credit facility and for
general corporate purposes. Under the 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 venture based on the expected full
stabilization of the asset. These distributions will be based on a 6.75%
capitalization rate for each phase delivered during the first three years of the
agreement. Under the agreement, we serve as the unconsolidated entity's
operating member, subject to authority and oversight of a board appointed by us
and Alinda, and separately we serve as manager and developer of the facility in
exchange for management and development fees. The agreement includes various
transfer restrictions and rights of first offer that will allow us to repurchase
Alinda's interest should Alinda wish to exit in the future. In addition, we have
agreed to provide Alinda an opportunity to invest in future similar entities
based on similar terms and a comparable capitalization rate. This agreement has
been reflected as an unconsolidated entity on our reported financial statements
beginning in the first quarter of 2019.
Operating Expenses. Our operating expenses generally consist of direct personnel
costs, utilities, property and ad valorem taxes, insurance and site maintenance
costs and rental expenses on our ground and building leases. In particular, our
buildings require significant power to support the data center operations
conducted in them. Although a significant portion of our long-term leases-leases
with a term greater than three years-contain reimbursements for certain
operating expenses, we will not in all instances be reimbursed for all of the
property operating expenses we incur. 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 continueto expand. 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 regards 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 footage remained consistent before and after renewal. All customers with
space changes are incorporated into new/modified leasing statistics and rates.
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The following leasing and booked-not-billed statistics include results of the
consolidated business as well as QTS' 50% pro rata share of revenue from the
unconsolidated entity, if any.
Incremental
Number of Annualized rent (2) Annualized Rent (2), Net
Period Leases per leased sq ft of DowngradesNew/modified leases signed Three Months EndedDecember 31, 2019 373
$ 465 $ 27,742,166 Year Ended December 31, 2019 1,741$ 465 $ 76,056,932 Number of Renewed Annualized rent (2) Period Leases per leased sq ft Annualized Rent (2) Rent Change Renewed Leases (1) Three Months Ended December 31, 2019 90$ 777 $ 11,522,508 (2.2) % Year Ended December 31, 2019 375$ 673 $ 62,778,972 1.0 %
(1) We define renewals as leases where the customer retains the same amount of
space before and after renewals, which facilitates rate comparability.
(2) We define annualized rent as MRR as of
The following table outlines the booked-not-billed balance as of
Booked-not-billed (1) 2020 2021 Thereafter Total MRR$ 3,457,580 $ 2,712,087 $ 1,586,883 $ 7,756,550
Incremental revenue (2) 23,969,832 22,511,306 19,042,596
Annualized revenue (3)(4)
Includes the Company's consolidated booked-not-billed balance in addition to
booked-not-billed revenue associated with the unconsolidated entity at QTS's
(1) pro rata share of the book-not-billed revenue. Of the
annualized booked-not-billed revenue, approximately
QTS's pro rata share of booked-not-billed revenue associated with the
unconsolidated entity.
Incremental revenue represents the expected amount of recognized MRR for the (2) business in the period based on when the booked-not-billed leases commence
throughout the period.
Annualized revenue represents the booked-not-billed MRR multiplied by 12, (3) 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.
As of
of revenue which had begun recognition via straight line rent, the Company's
(4) annualized booked-not-billed balance was
million was attributable to 2020,
$4.9 million was attributable to years thereafter. The Company estimates the remaining cost to provide the space, power, connectivity and other services to the customer contracts which had not billed as ofDecember 31, 2019 to be approximately$351 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. 73 Table of Contents Results of Operations
Year Ended
Changes in revenues and expenses for the year ended
Year Ended December 31,
2019 2018 $ Change % Change
Revenues:
Rental $ 465,123 $ 413,620 $ 51,503 12 %
Other 15,695 36,904 (21,209) (57) %
Total revenues 480,818 450,524 30,294 7 %
Operating expenses:
Property operating costs 156,048 148,236 7,812 5 %Real estate taxes and insurance 14,503 12,193
2,310 19 %
Depreciation and amortization 168,305 149,891 18,414 12 %
General and administrative 80,385 80,857 (472) (1) %Transaction, integration and impairment costs 15,190 2,743
12,447 454 %
Restructuring - 37,943 (37,943) (100) %
Total operating expenses 434,431 431,863 2,568 1 %Gain on sale of real estate, net 14,769 -
14,769 * %
Operating income 61,156 18,661 42,495 228 %
Other income and expense:
Interest income 111 150 (39) (26) %
Interest expense (26,593) (28,749) 2,156 (7) %
Debt restructuring costs (1,523) (605) (918) 152 %
Other expense (50) - (50) * %Equity in net loss of unconsolidated entity (1,473) - (1,473) * % Income (loss) before taxes 31,628 (10,543) 42,171 400 % Tax benefit of taxable REIT subsidiaries 37 3,368
(3,331) (99) %
Net income (loss) $ 31,665 $ (7,175) $ 38,840 541 %
Revenues. Total revenues for the year ended December 31, 2019 were $480.8
million compared to $450.5 million for the year ended December 31, 2018 . The
increase of $30.3 million , or 7%, was largely attributable to growth in our
hyperscale and hybrid colocation offerings in the Atlanta (DC-1), Chicago ,
Ashburn , Irving , Fort Worth and Piscataway data centers as well as revenue from
the Groningen data center which was acquired in April 2019 . In addition,
increased utility usage by our metered power customers increased our revenue
from operating cost reimbursement by approximately $9.7 million compared to the
prior year. Offsetting these increases were revenue reductions in various leased
facilities associated with our transition from certain cloud and managed
services offerings as a part of the strategic growth plan implemented in 2018.
Property Operating Costs. Property operating costs for the year ended December
31, 2019 were $156.0 million compared to property operating costs of
$148.2 million for the year ended December 31, 2018 , an increase of $7.8
million , or 5%. The breakdown of our property operating costs is summarized in
the table below (in thousands):
Year Ended December 31,
2019 2018 $ Change % Change
Property operating costs:
Direct payroll $ 23,618 $ 22,498 $ 1,120 5 %
Rent 12,882 13,446 (564) (4) %
Repairs and maintenance 12,125 14,525 (2,400) (17) %
Utilities 68,292 58,598 9,694 17 %
Management fee allocation 18,571 20,775 (2,204) (11) %
Other 20,560 18,394 2,166 12 %Total property operating costs$ 156,048 $ 148,236 $ 7,812
5 %
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Total property operating costs increased due to continued growth in our business
primarily attributable to an increase in utilities expense, direct payroll
expenses as well as bad debt expense (which is included in "Other"). These
increases were partially offset by expense reductions in repairs and
maintenance, management fee allocation and rent expense primarily related to our
transition from our cloud and managed services offerings associated with our
2018 strategic growth plan.
Real Estate Taxes and Insurance. Real estate taxes and insurance for the year
ended December 31, 2019 were $14.5 million compared to $12.2 million for the
year ended December 31, 2018 . The increase of $2.3 million , or 19%, was
primarily attributable to an increase in real estate taxes and personal property
taxes at our Irving , Ashburn , Chicago and Fort Worth facilities.
Depreciation and Amortization. Depreciation and amortization for the year ended
December 31, 2019 was $168.3 million compared to $149.9 million for the year
ended December 31, 2018 . The increase of $18.4 million , or 12%, was attributable
to additional depreciation expense primarily related to an increase in assets
placed in service in our Ashburn , Atlanta (DC-1), Chicago , and Irving
facilities.
General and Administrative Expenses. General and administrative expenses were
$80.4 million for the year ended December 31, 2019 compared to general and
administrative expenses of $80.9 million for the year ended December 31, 2018 , a
decrease of $0.5 million , or 1%. The decrease was primarily attributable to the
implementation of the aforementioned strategic growth plan, resulting in a
decrease in net payroll expenses and software licenses, partially offset by an
increase in equity-based compensation expense and professional services fees.
Transaction, Integration & Impairment Costs. Transaction, integration and
impairment costs were $15.2 million for the year ended December 31, 2019 ,
compared to $2.7 million for the year ended December 31, 2018 . The increase was
primarily attributable to a $11.5 million impairment recognized in 2019 related
to a write-down of certain data center assets and equipment in one of our
Dulles, Virginia data centers. The Dulles campus has two data center buildings
and we initiated a plan in the fourth quarter of 2019 to abandon one of the
buildings and relocate customers from the smaller and older facility being
abandoned to the newer facility in an effort to better optimize our operating
cost structure. The remaining costs for the year ended December 31, 2019 and
December 31, 2018 are primarily attributable to costs related to the examination
of actual and potential acquisitions.
Restructuring Costs. Restructuring costs, which are costs associated with our
strategic growth plan in the prior year, were $37.9 million for the year ended
December 31, 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
recognized during the year ended December 31, 2019 .
Gain on sale of real estate, net. The gain on sale of real estate net incurred
during the year ended December 31, 2019 primarily relates to a $13.4 million net
gain realized upon sale of the Manassas facility to the unconsolidated 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. In addition, during the year ended December 31,
2019 , we recognized a $1.4 million gain on sale of certain ancillary land
improvements near our Atlanta (DC-1) facility.
Interest Expense. Interest expense for the year ended December 31, 2019 was
$26.6 million compared to $28.7 million for the year ended December 31, 2018 .
The decrease of $2.2 million , or 7%, was due primarily to a higher level of
capitalized interest due to a larger construction in progress balance associated
with continued ongoing capital development projects, partially offset by an
increase in interest costs related to an increase in the average total debt
balance of $149.9 million .
Debt Restructuring Costs. Debt restructuring costs for the year ended December
31, 2019 were $1.5 million compared to debt restructuring costs of $0.6 million
for the year ended December 31, 2018 . The increase in debt restructuring costs
of $0.9 million was primarily attributable to an amendment and restatement of
our unsecured credit facility during the fourth quarter of 2019 which included a
new seven year term loan, increased capacity of the revolving credit facility
and extended maturity dates. The debt restructuring costs in 2018 related to
similar extension of terms (however, did not incorporate a new term loan),
modification of various covenants and reduced pricing associated with the credit
facility.
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
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recognized$0.1 million of foreign currency loss related to our investment inthe Netherlands facilities during the year endedDecember 31, 2019 , with no such expenses recognized during the prior year. Equity in net income (loss) of unconsolidated entity. This represents equity in earnings (loss) of our unconsolidated entity formed during the first quarter of 2019 that owns ourManassas data center. Equity in net loss was$1.5 million for the year endedDecember 31, 2019 , which was primarily attributable to real estate depreciation expenses, with no such equity in earnings (loss) recognized during the prior year. Tax Benefit of Taxable REIT Subsidiaries. Tax benefit of taxable REIT subsidiaries for the year endedDecember 31, 2019 was less than$0.1 million compared to$3.4 million for the year endedDecember 31, 2018 . The decrease in tax benefit was primarily attributable to an increase in valuation allowances recorded against current period operating losses relative to the prior period.
Year Ended
For a discussion comparing the Company's financial condition and results of operations for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 refer to subsection "Results of Operations - Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 " of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , which is incorporated by reference herein. This discussion should be read in conjunction with Item 8. Financial Statements and Supplementary Data. 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.
FFO, Operating FFO and Adjusted Operating FFO
We consider funds from operations ("FFO") to be a supplemental measure of our
performance which should be considered along with, but not as an alternative to,
net income (loss) and cash provided by operating activities as a measure of
operating performance. We calculate FFO in accordance with the standards
established by the National Association of Real Estate Investment Trusts
("NAREIT"). FFO represents net income (loss) (computed in accordance with GAAP),
adjusted to exclude gains (or losses) from sales of depreciable real estate
related to our primary business, impairment write-downs of depreciable real
estate related to our primary business, real estate-related depreciation and
amortization, and similar adjustments for unconsolidated entities. To the extent
we incur gains or losses from the sale of assets that are incidental to our
primary business, or incur impairment write-downs associated with assets that
are incidental to our primary business, we include such amounts in our
calculation of FFO. Our management uses FFO as a supplemental performance
measure because, in excluding real estate-related depreciation and amortization,
impairment 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.
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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, deferred taxes and equity-based
compensation.
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.
A reconciliation of net income (loss) to FFO, Operating FFO and Adjusted Operating FFO is presented below:
Year Ended December 31,
(unaudited $ in thousands) 2019 2018 2017
FFO
Net income (loss) $ 31,665 $ (7,175) $ 1,457 Equity in net loss of unconsolidated entity 1,473 - - Real estate depreciation and amortization 156,387 136,119 123,555 Gain on sale of real estate, net (13,408) - - Impairments of depreciated property 11,461 - - Pro rata share of FFO from unconsolidated entity 1,078
- -
FFO(1) 188,656 128,944 125,012
Preferred Stock Dividends (28,180) (16,666) -
FFO available to common stockholders & OP unit holders 160,476 112,278 125,012
Debt restructuring costs 1,523 605 19,992
Restructuring costs - 37,943 -Transaction and integration costs 3,729
2,743 11,060 Tax benefit associated with restructuring, transaction and integration costs
- (2,408) -
Operating FFO available to common stockholders & OP
unit holders(2) 165,728 151,161 156,064
Maintenance capital expenditures (4,233) (6,662) (5,009) Leasing commissions paid (31,102) (24,246) (20,115) Amortization of deferred financing costs and bond discount 3,917 3,856 3,868 Non real estate depreciation and amortization 11,918 13,772 17,369 Straight line rent revenue and expense and other (7,922) (6,770) (4,967) Tax benefit from operating results (37) (960) (9,778) Equity-based compensation expense 16,412 14,972 13,863 Adjustments for unconsolidated entity 118 - - Adjusted Operating FFO available to common stockholders $ $
$
& OP unit holders(2) 154,799 145,123 151,295
Beginning
disclose the amount of gains or losses from the sale of assets that are
incidental to our primary business included in FFO as well as impairment
write-downs associated with assets that are incidental to our primary
business included in FFO. FFO for the year ended
incidental to our primary business and were included in the "Gain on sale of
real estate, net" line item of the consolidated statements of operations. FFO
for the year ended
losses related to certain non-real estate product related assets that were
considered incidental to our primary business and were included in the
"Restructuring" line item of the consolidated statement of operations.
The Company's calculations of Operating FFO and Adjusted Operating FFO may (2) not be comparable to Operating FFO and Adjusted Operating FFO as calculated
by other REITs that do not use the same definition.
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Table of Contents
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. 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:
Year Ended December 31,
(unaudited $ in thousands) 2019 2018 2017
Recognized MRR in the period
Total period revenues (GAAP basis) $ 480,818 $ 450,524 $ 446,510
Less: Total period variable lease revenue from recoveries (55,046) (45,386) (37,886)
Total period deferred setup fees (15,156) (12,475) (10,690)
Total period straight line rent and other (20,349) (17,148) (22,848)
Recognized MRR in the period 390,267 375,515 375,086
MRR at period end
Total period revenues (GAAP basis) $ 480,818 $ 450,524 $ 446,510
Less: Total revenues excluding last month (438,810) (412,041) (406,345)
Total revenues for last month of period 42,008 38,483 40,165
Less: Last month variable lease revenue from recoveries (4,578) (3,822) (3,175)
Last month deferred setup fees (1,333) (1,015) (1,123)
Last month straight line rent and other (2,413) (2,505) (4,159)
Add: Pro rata share of MRR at period end of unconsolidated entity 350 - - MRR at period end *$ 34,034 $ 31,141 $ 31,708
Does not include our booked-not-billed MRR balance, which was
respectively.
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Table of Contents
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, debt restructuring costs, gain (loss) on
extinguishment of debt, transaction and integration 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:
Year Ended December 31,
(unaudited $ in thousands) 2019 2018 2017
Net Operating Income (NOI)
Net income (loss) $ 31,665 $ (7,175) $ 1,457 Equity in net loss of unconsolidated entity 1,473 -
-
Interest income (111) (150) (67)
Interest expense 26,593 28,749 30,523
Depreciation and amortization 168,305 149,891 140,924
Debt restructuring costs 1,523 605 19,992
Other expense 50 - -Tax benefit of taxable REIT subsidiaries (37) (3,368)
(9,778)
Transaction, integration and impairment costs 15,190 2,743
11,060
General and administrative expenses 80,385 80,857
87,231
Gain on sale of real estate, net (14,769) - - Restructuring - 37,943 - NOI from consolidated operations(1)$ 310,267 $ 290,095 $ 281,342 Pro rata share of NOI from unconsolidated entity 2,789 - - Total NOI$ 313,056 $ 290,095 $ 281,342 Breakdown of NOI by facility: Atlanta (DC - 1) data center (2)$ 96,196 $ 87,060
$ 80,648 Atlanta-Suwanee data center 48,704 48,165 48,365 Richmond data center 32,979 33,445 40,919 Irving data center 45,484 42,621 32,870 Dulles data center 11,730 16,944 21,672 Leased data centers (3) 8,793 9,695 12,006 Santa Clara data center 7,549 8,344 11,378 Piscataway data center 13,584 12,266 9,395 Princeton data center 9,977 9,729 9,598 Sacramento data center 6,204 7,448 6,804 Chicago data center 13,104 8,878 4,652 Ashburn data center 4,698 1,250 - Fort Worth data center 4,021 902 268 Other facilities (4) 7,244 3,348 2,767
NOI from consolidated operations(1)$ 310,267 $ 290,095 $ 281,342 Pro rata share of NOI from unconsolidated entity 2,789 -
-
Total NOI $ 313,056 $ 290,095 $ 281,342
79
Table of Contents
Includes facility level general and administrative allocation charges of 4%
of cash revenue for all facilities (with the exception of the leased (1) facilities acquired in 2015, which were allocated a charge of 10% of cash
revenues through 2018). These allocated charges aggregated to
and 2017, respectively.
This property was formerly known as "
the new property development.
(3) At
including those subject to finance leases.
Consists of
fees received from the unconsolidated entity.
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 related to
our primary business, and similar adjustments for unconsolidated entities.
Management uses EBITDAre as a supplemental performance measure because it
provides performance measures that, when compared year over year, captures the
performance of our operations by removing the impact of our capital structure
(primarily interest expense) and asset base charges (primarily depreciation and
amortization) from our operating results.
Due to the volatility and nature of certain significant charges and gains
recorded in our operating results that management believes are not reflective of
operating performance, we compute an adjusted measure of EBITDAre, which we
refer to as Adjusted EBITDA. We calculate Adjusted EBITDA as EBITDAre excluding
certain non-routine charges, write off of unamortized deferred financing costs,
gains (losses) on extinguishment of debt, restructuring costs, and transaction
and integration costs, as well as our pro-rata share of each of those respective
adjustments associated with the unconsolidated entity aggregated into one line
item categorized as "Adjustments for the unconsolidated entity." In addition, we
calculate Adjusted EBITDA excluding certain non-cash recurring costs such as
equity-based compensation. We believe that Adjusted EBITDA provides investors
with another financial measure that may facilitate comparisons of operating
performance between periods and, to the extent other REITs calculate Adjusted
EBITDA on a comparable basis, between REITs.
Management uses EBITDAre and Adjusted EBITDA as supplemental performance
measures as they provide useful measures of assessing our operating results.
Other companies may not calculate EBITDAre or Adjusted EBITDA in the same
manner. Accordingly, our EBITDAre and Adjusted EBITDA may not be comparable to
others. EBITDAre and Adjusted EBITDA should be considered only as supplements to
net income (loss) as measures of our performance and should not be used as
substitutes for net income (loss), as measures of our results of operations or
liquidity or as indications of funds available to meet our cash needs, including
our ability to make distributions to our stockholders.
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Table of Contents
A reconciliation of net income to EBITDAre and Adjusted EBITDA is presented
below:
Year Ended December 31,
(unaudited $ in thousands) 2019 2018 2017
EBITDAre and Adjusted EBITDA
Net income (loss) $ 31,665 $ (7,175) $ 1,457 Equity in net loss of unconsolidated entity 1,473
- -
Interest income (111) (150) (67)
Interest expense 26,593 28,749 30,523
Tax benefit of taxable REIT subsidiaries (37) (3,368) (9,778)
Depreciation and amortization 168,305 149,891 140,924 (Gain) loss on disposition of depreciated property (13,408) 6,994
-
Impairments of depreciated property 11,461 8,842 4,219
Pro rata share of EBITDAre from unconsolidated entity 2,775
- -
EBITDAre (1) 228,716 183,783 167,278
Debt restructuring costs 1,523 605 19,992Equity-based compensation expense 16,412 14,972 13,863 Restructuring costs - 22,107 - Transaction, integration and impairment costs 3,729
2,743 6,841 Adjusted EBITDA$ 250,380 $ 224,210 $ 207,974
Beginning
disclose the amount of gains or losses from the sale of assets that are
incidental to our primary business included in EBITDAre as well as impairment
write-downs associated with assets that are incidental to our primary
business included in EBITDAre. EBITDAre for the year ended
considered incidental to our primary business and were included in the "Gain
on sale of real estate, net" line item of the consolidated statement of
operations. No gains, losses or impairment write-downs associated with assets
incidental to our primary business were included in EBITDAre for the year
ended December 31, 2018 .
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.
We expect that we will incur approximately$550 million to$600 million in additional capital expenditures throughDecember 31, 2020 , in connection with the development of our data center facilities, which excludes acquisitions and includes of our 50% proportionate share of capital expenditures at theManassas facility that was contributed to an unconsolidated entity. We expect to spend approximately$450 million to$500 million of capital expenditures with vendors on development, and the remainder on other capital expenditures and capitalized internal 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 expenditures may vary. We expect to meet these costs and our other short-term liquidity needs through operating cash flow, cash and cash equivalents, borrowings under our credit facility, proceeds from the forward equity transactions discussed below, additional equity issuances through our ATM program or other capital markets activity. As ofFebruary 28, 2020 , we have approximately$220 million of expected proceeds that will be paid upon settlement of pending forward equity transactions. 81 Table of Contents
Our cash paid for capital expenditures for the years ended
Year Ended December 31,
2019 2018 2017
Development $ 256,012 $ 386,592 $ 213,632
Acquisitions 76,383 117,029 127,038
Maintenance capital expenditures 4,233 6,662 5,009
Other capital expenditures (1) 105,059 91,049 88,673
Total capital expenditures
Represents capital expenditures for capitalized interest, commissions, (1) 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 (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 . 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, distributions from our unconsolidated entity and issuance of
additional equity or debt securities, subject to prevailing market conditions,
as discussed below.
Equity Capital
OnMarch 15, 2018 , we issued 4,280,000 shares of 7.125% Series A Cumulative Redeemable Perpetual 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. We used the net proceeds of approximately$103.2 million to repay amounts outstanding under our unsecured revolving credit facility. OnJune 25, 2018 , we issued 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual 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. We used the net proceeds of approximately$304 million to repay amounts outstanding under our unsecured revolving credit facility. InFebruary 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 sold on a forward basis, which included 1,012,500 shares sold upon full exercise of the underwriters' option to purchase additional shares. We received net proceeds of approximately$159 million from the issuance of 4,000,000 shares during the first quarter of 2019, which were used to repay amounts outstanding under our unsecured revolving credit facility. During the third quarter of 2019, we settled 2,832,000 forward shares for total net proceeds of approximately$110 million , which was used to repay amounts outstanding under our revolving credit facility. Following this partial settlement, we have approximately$36 million of proceeds remaining available under this forward sale (subject to further adjustment as described below), which we expect to physically settle prior toMarch 31, 2020 with the issuance of approximately 0.9 million shares of common stock, although we have the right to elect settlement prior to that time. InJune 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$400 million of our Class A common stock, which may include shares to be sold on a forward basis. The use of forward sales under the ATM Program generally allows the Company to lock in a price on the sale of shares when sold by the forward sellers, but defer receiving the net proceeds from such sales until the shares are issued at settlement on a later date. 82 Table of Contents
During the year endedDecember 31, 2019 , we utilized the forward provisions under the ATM Program to allow for the sale of up to an aggregate of 2.9 million shares of our common stock. AtDecember 31, 2019 , we had not settled any of these forward sales. ThroughFebruary 28, 2020 (including the sales during the year endedDecember 31, 2019 described above), we utilized the forward provisions under the ATM Program to allow for the sale of up to an aggregate of 3.6 million shares of our common stock. As ofFebruary 28, 2020 , we had not settled any of these forward sales. The following table represents a summary of our equity issuances during the year endedDecember 31, 2019 , as well as throughFebruary 28, 2020 (in thousands): Net Forward Proceeds Remaining Expected Forward Settlement Offering Program Shares Sold Shares Settled Received Proceeds Available Maturity Date (1)
February 2019 Offering N/A 4,000$ 159,360 $ - N/A February 2019 Offering 3,763 2,832 (2) 109,998 35,799 March 31, 2020 June 2019$400 million ATM Program 2,864 - - 142,046 Various through January 17, 2021 Total as of December 31, 2019 $ 177,844 June 2019$400 million ATM Program 764 (3) - $ - 41,646 Various through January 30, 2021 Total as of February 28, 2020 $ 219,490
(1) Represents the final date which shares sold under each forward agreement may
be settled.
(2) Represents the number of forward shares we elected to physically settle
during the year ended
(3) Represents shares issued on a forward basis subsequent to
through February 28, 2020 .
We expect to physically settle (by delivering shares of common stock) the
forward sales under the ATM program and the February 2019 Offering prior to the
first anniversary date of each respective transaction. As seen in the table
above, when combined with proceeds remaining available under the forward sale in
the February 2019 Offering, we currently have access to nearly $220 million of
net proceeds through forward stock sales (subject to further adjustment as
described below). We view forward equity sales under our ATM program 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 program.
At any time during the term of any forward sale, the Company may settle the forward sale by physical delivery of shares of common stock to the forward purchaser or, at the Company's 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. Previously, inMarch 2017 , 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$300 million of our Class A common stock. We terminated the prior ATM program inMarch 2019 in connection with the expiration of our prior universal shelf registration statement. We replaced our expired universal shelf registration statement with a new universal registration inApril 2019 .
Manassas Unconsolidated Entity.
OnFebruary 22, 2019 , we entered into an agreement withAlinda Capital Partners ("Alinda"), an infrastructure investment firm, with respect to ourManassas 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 cash 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 unconsolidated entity at closing that carries a rate of LIBOR plus 2.25%. We used these proceeds to pay down our revolving credit facility and for general corporate purposes. Under the agreement, we will receive additional proceeds in the future as and when we complete development of each phase of theManassas data center and place it into service, which allows us to receive proceeds for Alinda's share of the unconsolidated entity based on the expected full stabilization of the asset. These proceeds will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the venture. 83 Table of Contents Cash
As of
Dividends and Distributions
The following tables present quarterly cash dividends and distributions paid to
QTS' common and preferred stockholders and the
Year Ended December 31, 2019
Aggregate
Per Share and Dividend/Distribution
Record Date Payment Date Per Unit Rate Amount (in millions)
Common Stock/Units
September 19, 2019 October 4, 2019 $ 0.44 $ 27.3
June 25, 2019 July 9, 2019 0.44 27.3
March 20, 2019 April 4, 2019 0.44 27.3
December 21, 2018 January 8, 2019 0.41 23.7
$ 105.6
Series A Preferred Stock/Units
September 30, 2019 October 15, 2019 $ 0.45 $ 1.9
June 30, 2019 July 15, 2019 0.45 1.9
March 31, 2019 April 15, 2019 0.45 1.9
December 31, 2018 January 15, 2019 0.45 1.9
$ 7.6
Series B Preferred Stock/Units
September 30, 2019 October 15, 2019 $ 1.63 $ 5.1
June 30, 2019 July 15, 2019 1.63 5.1
March 31, 2019 April 15, 2019 1.63 5.1
December 31, 2018 January 15, 2019 1.63 5.1
$ 20.4
Year Ended December 31, 2018
Aggregate
Per Share and Dividend/Distribution
Record Date Payment Date Per Unit Rate Amount (in millions)
Common Stock/Units
September 20, 2018 October 4, 2018 $ 0.41 $ 23.7
June 20, 2018 July 6, 2018 0.41 23.7
March 22, 2018 April 5, 2018 0.41 23.7
December 5, 2017 January 5, 2018 0.39 22.2
$ 93.3
Series A Preferred Stock/Units
September 28, 2018 October 15, 2018 $ 0.45 $ 1.9
June 29, 2018 July 16, 2018 0.45 1.9
April 5, 2018 April 16, 2018 0.15 0.6
$ 4.4
Series B Preferred Stock/Units
September 30, 2018 October 15, 2018 $ 1.99 $ 6.3
$ 6.3
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Table of Contents
Additionally, subsequent to
On
?
stockholders and unit holders of record as of the close of business on December
20, 2019. OnJanuary 15, 2020 , the Company paid a quarterly cash dividend of
approximately
? Series A Preferred Stock of record as of the close of business on
2019, and the
approximately
the Company. OnJanuary 15, 2020 , the Company paid a quarterly cash dividend of
approximately
? Series B Preferred Stock of record as of the close of business on
2019, and the
approximately
the Company. Indebtedness
As of
Unsecured Credit Facility. We amended and restated our unsecured credit facility inOctober 2019 (as so amended and restated, the "unsecured credit facility"), which among other things, increased the total potential borrowings, extended maturity dates, lowered interest rates, and provided for an additional term loan under the agreement. The unsecured credit facility includes a$225 million term loan which matures onDecember 17, 2024 ("Term Loan A"), a$225 million term loan which matures onApril 27, 2025 ("Term Loan B"), an additional term loan of$250 million which matures onOctober 18, 2026 ("Term Loan C") and a$1.0 billion revolving credit facility which matures onDecember 17, 2023 . The revolving portion of the credit facility has a one-year extension option available to the Company. Amounts outstanding under the new 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 1.25% to 1.85% for LIBOR loans and 0.25% to 0.85% for base rate loans. For Term Loan A and Term Loan B, the spread ranges from 1.20% to 1.80% for LIBOR loans and 0.20% to 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$300 million in various foreign currencies.
Under the new unsecured credit facility, the capacity may be increased from the current capacity of$1.7 billion to$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 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 new 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) theOperating 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 theOperating Partnership has provided written notice to the 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 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 theOperating Partnership has provided written notice to the 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) cannot be less than the sum of$1,686,000,000 plus 75% of the net proceeds from any equity offerings subsequent toJune 30, 2019 . 85 Table of Contents The availability under the new revolving credit facility is the lesser of (i)$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 theOperating Partnership has provided written notice to the 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 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 theOperating 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. As ofDecember 31, 2019 , we had outstanding$1,017.0 million of indebtedness under the unsecured credit facility, consisting of$317 million of outstanding borrowings under the unsecured revolving credit facility and$700 million outstanding under the term loans, exclusive of net debt issuance costs of$6.4 million . In connection with the unsecured credit facility, as ofDecember 31, 2019 , we had additional letters of credit outstanding aggregating to$4.0 million . OnApril 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 Term Loan A and$200 million allocated to Term Loan B, fromJanuary 2, 2018 throughDecember 17, 2021 andApril 27, 2022 , respectively. OnDecember 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 Term Loan A and$200 million allocated to Term Loan B, fromDecember 17, 2021 throughDecember 17, 2023 andApril 27, 2022 throughApril 27, 2024 , respectively. OnDecember 20, 2018 , we entered into additional forward interest rate swap agreements with an aggregate notional amount of$200 million . The forward swap agreements effectively fix the interest rate on$100 million of additional term loan borrowings fromJanuary 2, 2020 throughDecember 17, 2023 as well as$100 million of additional term loan borrowings fromJanuary 2, 2020 throughApril 27, 2024 . 4.750% Senior Notes due 2025. OnNovember 8, 2017 , theOperating Partnership andQTS Finance Corporation , a subsidiary of theOperating Partnership 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 4.750% Senior Notes dueNovember 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.
The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of theOperating Partnership's existing subsidiaries (other than 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 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 ofNovember 8, 2017 , among QTS, the Issuers, the guarantors named therein, andDeutsche Bank Trust Company Americas , as trustee (the "Indenture"). As ofDecember 31, 2019 , the outstanding net debt issuance costs associated with the Senior Notes were$4.5 million . The Indenture contains affirmative and negative covenants that, among other things, limits or restricts theOperating 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 theOperating 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 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.
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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 December 31, 2019 , the outstanding balance under the Lenexa mortgage was$1.7 million . Contingencies We are subject to various routine legal proceedings and other matters in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, management believes, based upon information currently available, that the final outcome of these proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations. Contractual Obligations The following table summarizes our contractual obligations as ofDecember 31, 2019 , including the future non-cancellable minimum rental payments required under operating leases and the maturities and scheduled principal repayments of indebtedness and other agreements (in thousands): Obligations (1) 2020 2021 2022 2023 2024 Thereafter Total Operating Leases$ 9,589 $ 9,818 $ 10,266 $
10,393
2,579 2,712 2,958 3,229 3,516 30,146 45,140
Future Principal Payments of
Indebtedness (2) 64 73 1,599 317,028 225,000 875,000 1,418,764
Total (3) $ 12,232 $ 12,603 $ 14,823 $ 330,650 $ 236,833 $ 954,054 $ 1,561,195 (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.
Does not include the related debt issuance costs on the Senior Notes nor the
(2) related debt issuance costs on the term loans reflected at
Also does not include letters of credit outstanding aggregating to $4.0
million as of December 31, 2019 under our unsecured credit facility.
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 (3) 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 December 31, 2019 (in
thousands):
2020 2021 2022 2023 2024 Thereafter Total
$ 55,389 $ 55,333 $ 57,235 $ 56,983 $ 42,075 $ 37,930 $ 304,945 Off-Balance Sheet Arrangements
OnFebruary 22, 2019 , we entered into an agreement withAlinda Capital Partners ("Alinda"), an infrastructure investment firm, with respect to ourManassas data center, as described above under "Factors That May Influence Future Results of Operations and Cash Flows." As ofDecember 31, 2019 , our pro rata share of mortgage debt of the unconsolidated entity, excluding deferred financing costs, was approximately$35.1 million , all of which is subject to 87
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forward interest rate swap agreements. See Item 7A, Quantitative and Qualitative Disclosures About Market Risk, for information on the Company's interest rate swaps.
InFebruary 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 sold on a forward basis. During the third quarter of 2019, we settled 2,832,000 forward shares for total net proceeds of approximately$110 million , which was used to repay amounts outstanding under our revolving credit facility. Following this partial settlement, we have approximately$36 million of proceeds remaining available under this forward sale (subject to further adjustment as described above under the heading "Equity Capital"), which we expect to physically settle prior toMarch 31, 2020 with the issuance of approximately 0.9 million shares of common stock, although we have the right to elect settlement prior to that time. During the year endedDecember 31, 2019 , we utilized the forward provisions under the ATM Program to allow for the sale of up to an aggregate of 2.9 million shares of our common stock, representing available net proceeds upon physical settlement of approximately$142 million (subject to further adjustment as described above under the heading "Equity Capital"). AtDecember 31, 2019 , the Company had not settled any of these forward sales and had approximately$258 million of Class A common stock remaining available for sale under the ATM program. ThroughFebruary 28, 2020 (including the sales during the year endedDecember 31, 2019 described above), the Company utilized the forward provisions under the ATM Program to allow for the sale of up to an aggregate of 3.6 million shares of its common stock, representing available net proceeds upon physical settlement of approximately$184 million (subject to further adjustment as described above under the heading "Equity Capital"). As ofFebruary 28, 2020 , the Company had not settled any of these forward sales and had approximately$216 million of Class A common stock remaining available for sale under the ATM Program. The Company expects to physically settle (by delivering shares of common stock) these forward sales prior to the first anniversary date of each respective transaction. When combined with the approximately$36 million of proceeds remaining available under the forward sale in the first quarter of 2019, the Company currently has access to nearly$220 million of net proceeds through forward stock sales (subject to further adjustment as described above under the heading "Equity Capital"). The Company views forward equity sales under its ATM Program as an important capital raising tool that it expects to continue to strategically and selectively use, subject to market conditions and overall availability under the ATM Program. Cash Flows Year Ended December 31, (in thousands) 2019 2018 2017 Cash flow provided by (used for): Operating activities$ 199,490 $ 191,273 $ 170,323 Investing activities (387,260) (598,553) (434,352) Financing activities 191,396 410,796 262,692
Year Ended
Cash flow provided by operating activities was$199.5 million for the year endedDecember 31, 2019 , compared to$191.3 million for the year endedDecember 31, 2018 . The increase in cash flow provided by operating activities of$8.2 million was primarily due to an increase in cash operating income of$40.4 million , offset by a decrease in cash flow associated with net changes in working capital of$32.1 million primarily relating to an increase in rents and other receivables. Cash flow used for investing activities decreased by$211.3 million to$387.3 million for the year endedDecember 31, 2019 , compared to$598.6 million for the year endedDecember 31, 2018 . The decrease was due primarily to cash proceeds of$52.7 million received from the Company's contribution of assets to an unconsolidated entity during 2019 as well as a decrease in additions to property and equipment of$123.1 million . In addition, cash paid for acquisitions decreased$40.6 million primarily related to increased cash paid for land acquisitions adjacent toAtlanta (DC-1) andManassas in 2018. 88 Table of Contents
Cash flow provided by financing activities was$191.4 million for the year endedDecember 31, 2019 , compared to$410.8 million for the year endedDecember 31, 2018 . The decrease was primarily due to lower net equity issuance proceeds of$139.2 million , higher payments of cash dividends to common and preferred stockholders of$29.0 million , and lower net proceeds of$56.0 million under our unsecured credit facility.
Year Ended
For a discussion comparing the Company's liquidity and capital resources for the year endedDecember 31, 2018 compared to the year endedDecember 31, 2017 refer to subsection "Liquidity and Capital Resources - Year EndedDecember 31, 2018 Compared to Year EndedDecember 31, 2017 " of Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations in our Annual Report on Form 10-K for the year endedDecember 31, 2018 , which is incorporated by reference herein. This discussion should be read in conjunction with Item 8. Financial Statements and Supplementary Data.
Critical Accounting Policies and Estimates
Our discussion and analysis of our financial condition and results of operations is based upon our financial statements which have been prepared in accordance with GAAP. The preparation of these financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities at the date of the financial statements and the reported amount of revenues and expenses during the reporting period. Actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 2 of our audited financial statements included elsewhere in this Form 10-K. We describe below accounting policies that require material subjective or complex judgments and that have the most significant impact on our financial condition and results of operations. Acquisitions and Sales of Real Estate. When accounting for business combinations, asset acquisitions and real estate sales, we are required to make subjective assessments which involve significant judgment to allocate the purchase price paid to the acquired tangible assets and intangible assets and liabilities for asset acquisitions and business combinations and to determine the amount of non-monetary consideration received for sales of real estate. In order to determine fair values associated with assets we acquire or non-monetary consideration received in sales of real estate assets, we utilize estimation models to derive the fair value of identifiable assets and any equity consideration received. These estimation models consist of common real estate valuation models that include Level 3 inputs such as market rents, discount rates, expected occupancy and estimates of additional capital expenditures, and capitalization rates derived from market data.
Unconsolidated Affiliates. We account for our 50% equity investment in our unconsolidated entity arrangement using the equity method of accounting. We determined that while the entity is a variable interest entity ("VIE"), we were not the primary beneficiary, thus the equity method of accounting was appropriate for transactions between QTS and the entity.
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. Determining which
reporting entity, if any, is 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.
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,
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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.
Capitalization of Costs. We capitalize certain development costs, including internal costs, incurred in connection with development of real estate assets. The capitalization of costs during the construction period (including interest and related loan fees, property taxes, internal payroll costs, and other direct and indirect project costs) begins when redevelopment efforts commence and ends when the asset is ready for its intended use. Impairment of Long-Lived Assets andGoodwill . Whenever events or changes in circumstances indicate that the carrying amount of the asset group(s) may not be recoverable, we assess whether there has been impairment in the value of long-lived assets used in operations or in development and intangible assets. Recoverability of assets to be held and used is generally measured by comparison of the carrying amount of the asset group 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 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. The fair value of goodwill is the consideration transferred 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 the Company performed onOctober 1, 2019 , the Company determined qualitatively that it is not more likely than not that the fair value of the Company's one reporting unit was less than the carrying amount, thus it did not perform a quantitative analysis. Rental Revenue. We, as a lessor, have retained substantially all the risks and benefits of ownership and account for our leases as operating leases. ASC Topic 842 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 Topic 842 if the lease component is the predominant component and is accounted for under ASC Topic 606 if the nonlease components are the predominant components. We combine our lease and nonlease components that meet the defined criteria and account for the combined lease component under ASC Topic 842. 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. Rental revenue also includes amortization of set-up fees which are amortized over the term of the respective lease, as discussed above. Inflation A significant portion of our long-term leases-leases with a term greater than three years-contain rent increases and reimbursement for certain operating costs. As a result, we believe that we are largely insulated from the effects of inflation over periods greater than three years. Leases with terms of three years or less will be replaced or renegotiated within three years and should adjust to reflect changed conditions, also mitigating the effects of inflation. Moreover, to the extent that there are material increases in utility costs, we generally reserve the right to renegotiate the rate. However, any increases in the costs of redevelopment of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to redevelop our properties and increased depreciation and amortization expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these redevelopment costs to our customers in the form of higher rental rates. Distribution Policy To satisfy the requirements to qualify as a REIT, and to avoid paying tax on our income, QTS intends to continue to make regular quarterly distributions of all, or substantially all, of its REIT taxable income (excluding net capital gains) to its stockholders.
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
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estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs and the amount necessary to avoid the payment of tax on undistributed income. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to borrow funds to make certain distributions. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.The Operating Partnership also includes certain partners that are subject to a taxable income allocation, however, not entitled to receive recurring distributions. The partnership agreement does stipulate however, to the extent that taxable income is allocated to these partners that the partnership will make a distribution to these partners equal to the lesser of the actual per unit distributions made to Class A partners or an estimated amount to cover federal, state and local taxes on the allocated taxable income. No such distributions were made during the years endedDecember 31, 2019 , 2018 or 2017.
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