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FORM 10-Q

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

________________________________________________________

(Mark One)


☒			QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2021


☐			TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from___________to___________

Commission File Number 001-36109

__________________________________________________________

QTS Realty Trust, Inc.

(Exact name of registrant as specified in its charter)

__________________________________________________________

Maryland

(State or other jurisdiction of

incorporation or organization)

12851 Foster Street, Overland Park, Kansas

(Address of principal executive offices)

46-2809094

(I.R.S. Employer

Identification No.)

66213

(Zip Code)

(913) 312-5503

(Registrant’s telephone number, including area code)

Not Applicable

(Former name, former address and former fiscal year, if changed since last report)

__________________________________________________________

Securities registered pursuant to Section 12(b) of the Act:

Title of each class:

Trading Symbol

Name of each exchange on which registered:

Class A common stock, $0.01 par value

QTS

New York Stock Exchange

Preferred Stock, 7.125% Series A Cumulative Redeemable Perpetual, $0.01 par value

QTS PRA

New York Stock Exchange

Preferred Stock, 6.50% Series B Cumulative Convertible Perpetual, $0.01 par value

QTS PRB

New York Stock Exchange

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes x No o

Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).

Yes x No o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer

☒

Accelerated filer

☐

Non-accelerated filer

☐

Smaller reporting company

☐

Emerging growth company

☐

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes ☐ No x

There were 76,972,731 shares of Class A common stock, $0.01 par value per share, and 124,481 shares of Class B common stock, $0.01 par value per share, of QTS Realty Trust, Inc. outstanding on July 30, 2021.

Table of Contents

QTS Realty Trust, Inc.

Form 10-Q

For the Quarterly Period Ended June 30, 2021

INDEX


		Page
PART I.	FINANCIAL INFORMATION	2

ITEM 1.	Financial Statements	2

	Notes to the Financial Statements	9

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	30

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	49

ITEM 4.	Controls and Procedures	50

PART II.	OTHER INFORMATION	52

ITEM 1.	Legal Proceedings	52

ITEM 1A.	Risk Factors	52

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	55

ITEM 3.	Defaults Upon Senior Securities	55

ITEM 4.	Mine Safety Disclosures	55

ITEM 5.	Other Information	56

ITEM 6.	Exhibits	56

	Signatures	58

Table of Contents

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)


	June 30, 2021		December 31, 2020
	(unaudited)
ASSETS
Real Estate Assets
Land	$	175,348	$	165,109
Buildings, improvements and equipment	3,138,583		2,839,261
Less: Accumulated depreciation	(789,192)		(702,944)
	2,524,739		2,301,426
Construction in progress	1,214,794		1,028,765
Real Estate Assets, net	3,739,533		3,330,191
Investments in unconsolidated entity	12,430		22,608
Operating lease right-of-use assets, net	48,342		51,342
Cash and cash equivalents	28,068		22,775
Rents and other receivables, net	134,870		107,563
Acquired intangibles, net	62,093		68,090
Deferred costs, net	69,133		63,689
Prepaid expenses	12,310		10,253
Goodwill	173,843		173,843
Other assets, net	53,967		48,218
TOTAL ASSETS	$	4,334,589	$	3,898,572

LIABILITIES
Unsecured term loans and revolver, net	$	1,038,833	$	1,335,241
Senior notes, net of debt issuance costs	493,016		492,534
Finance leases	42,395		41,718
Operating lease liabilities	54,629		58,005
Accounts payable and accrued liabilities	240,738		187,270
Dividends and distributions payable	45,248		39,373
Advance rents, security deposits and other liabilities	19,818		19,850
Derivative liabilities	35,173		53,722
Deferred income taxes	948		810
Deferred income	114,978		85,351
TOTAL LIABILITIES	2,085,776		2,313,874

EQUITY
7.125% Series A cumulative redeemable perpetual preferred stock: $0.01 par value (liquidation preference $25.00 per share), 4,600,000 shares authorized, 4,280,000 shares issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	103,212		103,212
6.50% Series B cumulative convertible perpetual preferred stock: $0.01 par value (liquidation preference $100.00 per share), 3,162,500 shares authorized, issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	304,223		304,223
Common stock: $0.01 par value, 450,133,000 shares authorized, 77,030,269 and 64,580,118 issued and outstanding as of June 30, 2021 and December 31, 2020, respectively	770		646
Additional paid-in capital	2,305,032		1,622,857
Accumulated other comprehensive loss	(31,638)		(50,451)
Accumulated dividends in excess of earnings	(574,756)		(504,313)
Total stockholders’ equity	2,106,843		1,476,174
Noncontrolling interests	141,970		108,524
TOTAL EQUITY	2,248,813		1,584,698
TOTAL LIABILITIES AND EQUITY	$	4,334,589	$	3,898,572

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands except per share data)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Revenues:
Rental	$	150,807	$	125,996	$	295,115	$	246,077
Other	4,413		5,644		8,837		11,855
Total revenues	155,220		131,640		303,952		257,932
Operating expenses:
Property operating costs	45,704		40,349		91,988		81,130
Real estate taxes and insurance	5,788		4,106		10,810		8,017
Depreciation and amortization	58,255		47,554		113,761		92,624
General and administrative	24,476		21,391		48,117		42,074
Transaction and integration costs	8,391		381		9,907		597
Total operating expenses	142,614		113,781		274,583		224,442
Operating income	12,606		17,859		29,369		33,490
Other income and expense:
Interest income	1		2		1		2
Interest expense	(7,452)		(6,924)		(15,600)		(14,086)
Other income	—		—		—		159
Equity in net loss of unconsolidated entity	(705)		(590)		(1,264)		(1,267)
Income before taxes	4,450		10,347		12,506		18,298
Tax benefit (expense)	(251)		(138)		(389)		31
Net income	4,199		10,209		12,117		18,329
Net (income) loss attributable to noncontrolling interests	251		(317)		172		(427)
Net income attributable to QTS Realty Trust, Inc.	$	4,450	$	9,892	$	12,289	$	17,902
Preferred stock dividends	(7,045)		(7,045)		(14,090)		(14,090)
Net income (loss) attributable to common stockholders	$	(2,595)	$	2,847	$	(1,801)	$	3,812

Net loss per share attributable to common shares
Basic	$	(0.08)	$	(0.05)	$	(0.15)	$	(0.06)
Diluted	$	(0.08)	$	(0.05)	$	(0.15)	$	(0.06)

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(unaudited and in thousands)


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Net income	$	4,199	$	10,209	$	12,117	$	18,329
Other comprehensive income (loss):
Foreign currency translation adjustment gain (loss)	54		64		(104)		(159)
Increase (decrease) in fair value of derivative contracts	4,145		(3,641)		21,398		(40,356)
Reclassification of other comprehensive income to utilities expense	160		410		94		764
Reclassification of other comprehensive income to interest expense	3,414		2,703		6,789		3,461
Comprehensive income (loss)	11,972		9,745		40,294		(17,961)
Comprehensive (income) loss attributable to noncontrolling interests	(956)		(1,022)		(3,514)		1,809
Comprehensive income (loss) attributable to QTS Realty Trust, Inc.	$	11,016	$	8,723	$	36,780	$	(16,152)

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF EQUITY

(unaudited and in thousands)

The consolidated statement of equity for the three and six months ended June 30, 2021:


	Preferred Stock			Common stock			Additional paid-in capital		Accumulated other comprehensive income (loss)		Accumulated dividends in excess of earnings		Total Stockholders' equity		Noncontrolling interests		Total
	Shares	Amount		Shares	Amount
Balance January 1, 2021	7,443	$	407,435	64,580	$	646	$	1,622,857	$	(50,451)	$	(504,313)	$	1,476,174	$	108,524	$	1,584,698
Net share activity through equity award plan	—	—		426	4		50		—		—		54		5		59
Conversion of Class A Partnership units to Class A common stock	—	—		92	1		2,040		—		—		2,041		(2,041)		—
Increase in fair value of derivative contracts	—	—		—	—		—		15,414		—		15,414		1,839		17,253
Foreign currency translation adjustments	—	—		—	—		—		(144)		—		(144)		(14)		(158)
Equity-based compensation expense	—	—		—	—		6,237		—		—		6,237		619		6,856
Proceeds net of fees from settlement of forward shares	—	—		3,865	39		203,125		—		—		203,164		12,682		215,846
Dividends declared on Series A Preferred Stock	—	—		—	—		—		—		(1,906)		(1,906)		—		(1,906)
Dividends declared on Series B Convertible Preferred Stock	—	—		—	—		—		—		(5,139)		(5,139)		—		(5,139)
Dividends declared to common stockholders	—	—		—	—		—		—		(32,512)		(32,512)		—		(32,512)
Dividends declared to noncontrolling interests	—	—		—	—		—		—		—		—		(3,235)		(3,235)
Net Income	—	—		—	—		—		—		7,839		7,839		79		7,918
Balance March 31, 2021	7,443	$	407,435	68,963	$	690	$	1,834,309	$	(35,181)	$	(536,031)	$	1,671,222	$	118,458	$	1,789,680
Net share activity through equity award plan	—	—		(132)	(1)		(986)		—		—		(987)		(91)		(1,078)
Conversion of Class A Partnership units to Class A common stock	—	—		26	—		629		—		—		629		(629)		—
Increase in fair value of derivative contracts	—	—		—	—		—		3,494		—		3,494		651		4,145
Foreign currency translation adjustments	—	—		—	—		—		49		—		49		5		54
Equity-based compensation expense	—	—		—	—		6,695		—		—		6,695		616		7,311
Proceeds net of fees from settlement of forward shares	—	—		8,173	81		464,385		—		—		464,466		26,431		490,897
Dividends declared on Series A Preferred Stock	—	—		—	—		—		—		(1,906)		(1,906)		—		(1,906)
Dividends declared on Series B Convertible Preferred Stock	—	—		—	—		—		—		(5,139)		(5,139)		—		(5,139)
Dividends declared to common stockholders	—	—		—	—		—		—		(36,130)		(36,130)		—		(36,130)
Dividends declared to noncontrolling interests	—	—		—	—		—		—		—		—		(3,220)		(3,220)
Net Income	—	—		—	—		—		—		4,450		4,450		(251)		4,199
Balance June 30, 2021	7,443	$	407,435	77,030	$	770	$	2,305,032	$	(31,638)	$	(574,756)	$	2,106,843	$	141,970	$	2,248,813

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The consolidated statement of equity for the three and six months ended June 30, 2020:


	Preferred Stock			Common stock			Additional paid-in capital		Accumulated other comprehensive income (loss)		Accumulated dividends in excess of earnings		Total Stockholders' equity		Noncontrolling interests		Total
	Shares	Amount		Shares	Amount
Balance January 1, 2020	7,443	$	407,435	58,228	$	582	$	1,330,444	$	(24,642)	$	(376,002)	$	1,337,817	$	106,634	$	1,444,451
Net share activity through equity award plan	—	—		240	3		(1,312)		—		—		(1,309)		(149)		(1,458)
Decrease in fair value of derivative contracts	—	—		—	—		—		(33,155)		—		(33,155)		(3,560)		(36,715)
Foreign currency translation adjustments	—	—		—	—		—		(201)		—		(201)		(22)		(223)
Equity-based compensation expense	—	—		—	—		4,377		—		—		4,377		498		4,875
Proceeds net of fees from settlement of forward shares	—	—		1,930	19		78,516		—		—		78,535		4,682		83,217
Dividends declared on Series A Preferred Stock	—	—		—	—		—		—		(1,906)		(1,906)		—		(1,906)
Dividends declared on Series B Convertible Preferred Stock	—	—		—	—		—		—		(5,139)		(5,139)		—		(5,139)
Dividends declared to common stockholders	—	—		—	—		—		—		(28,393)		(28,393)		—		(28,393)
Dividends declared to noncontrolling interests	—	—		—	—		—		—		—		—		(3,133)		(3,133)
Net income	—	—		—	—		—		—		8,010		8,010		110		8,120
Balance March 31, 2020	7,443	$	407,435	60,398	$	604	$	1,412,025	$	(57,998)	$	(403,430)	$	1,358,636	$	105,060	$	1,463,696
Net share activity through equity award plan	—	—		1	—		(1,225)		—		—		(1,225)		(135)		(1,360)
Decrease in fair value of derivative contracts	—	—		—	—		—		(3,382)		—		(3,382)		(259)		(3,641)
Foreign currency translation adjustments	—	—		—	—		—		58		—		58		6		64
Equity-based compensation expense	—	—		—	—		5,477		—		—		5,477		604		6,081
Proceeds net of fees from settlement of forward shares	—	—		1,033	10		47,168		—		—		47,178		3,277		50,455
Dividends declared on Series A Preferred Stock	—	—		—	—		—		—		(1,906)		(1,906)		—		(1,906)
Dividends declared on Series B Convertible Preferred Stock	—	—		—	—		—		—		(5,139)		(5,139)		—		(5,139)
Dividends declared to common stockholders	—	—		—	—		—		—		(28,389)		(28,389)		—		(28,389)
Dividends declared to noncontrolling interests	—	—		—	—		—		—		—		—		(3,134)		(3,134)
Net income	—	—		—	—		—		—		9,892		9,892		317		10,209
Balance June 30, 2020	7,443	$	407,435	61,432	$	614	$	1,463,445	$	(61,322)	$	(428,972)	$	1,381,200	$	105,736	$	1,486,936

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited and in thousands)


	Six Months Ended June 30,
	2021		2020
Cash flow from operating activities:
Net income	$	12,117	$	18,329
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization	110,616		89,183
Amortization of above and below market leases	(9)		180
Amortization of deferred loan costs	2,259		1,978
Distributions from unconsolidated entity	1,381		600
Equity in net loss of unconsolidated entity	1,264		1,267
Equity-based compensation expense	14,167		10,956
Bad debt expense	455		5,072
Deferred tax expense (benefit)	141		(238)
Foreign currency remeasurement (income) loss	—		(159)
Changes in operating assets and liabilities
Rents and other receivables, net	(27,845)		(536)
Prepaid expenses	(2,066)		(1,259)
Due to/from affiliates, net	(3,865)		(1,085)
Other assets	(822)		(127)
Accounts payable and accrued liabilities	10,763		2,548
Advance rents, security deposits and other liabilities	140		2,374
Deferred income	29,679		4,283
Net cash provided by operating activities	148,375		133,366

Cash flow from investing activities:
Distribution of capital from unconsolidated entity	11,910		—
Acquisitions, net of cash acquired	(27,154)		(1,797)
Additions to property and equipment	(453,401)		(377,655)
Net cash used in investing activities	(468,645)		(379,452)

Cash flow from financing activities:
Credit facility proceeds	580,528		298,405
Credit facility repayments	(874,000)		(108,000)
Payment of deferred financing costs	—		(101)
Payment of preferred stock dividends	(14,090)		(14,090)
Payment of common stock dividends	(62,865)		(54,020)
Distribution to noncontrolling interests	(6,317)		(6,068)
Proceeds from exercise of stock options	1,979		882
Payment of tax withholdings related to equity-based awards	(2,485)		(3,327)
Principal payments on finance lease obligations	(1,349)		(1,275)
Mortgage principal debt repayments	—		(29)
Common stock issuance proceeds, net of costs	706,863		134,077
Net cash provided by financing activities	328,264		246,454
Effect of foreign currency exchange rates on cash and cash equivalents	(2,701)		453
Net change in cash and cash equivalents	5,293		821
Cash and cash equivalents, beginning of period	22,775		15,653
Cash and cash equivalents, end of period	$	28,068	$	16,474

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (continued)

(unaudited and in thousands)


	Six Months Ended June 30,
	2021		2020
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest	$	27,987	$	28,059
Noncash investing and financing activities:
Accrued capital additions	$	168,699	$	118,627
Net increase (decrease) in other assets/liabilities related to change in fair value of derivative contracts	$	21,398	$	(38,688)
Accrued equity issuance costs	$	—	$	405
Accrued preferred stock dividend	$	5,938	$	5,938

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

QTS Realty Trust, Inc. (“QTS”), through its controlling interest in QualityTech, LP (the “Operating Partnership” and collectively with QTS and its subsidiaries, the “Company,” “we,” “us,” or “our”) and the subsidiaries of the Operating Partnership, is engaged in the business of owning, acquiring, constructing, redeveloping and managing multi-tenant data centers. As of June 30, 2021, our portfolio consisted of 28 owned and leased properties, including a property owned by an unconsolidated entity, with data centers located throughout the United States, Canada and Europe.

QTS elected to be taxed as a real estate investment trust (“REIT”) for U.S. federal income tax purposes commencing with its taxable year ended December 31, 2013. As a REIT, QTS generally is not required to pay federal corporate income taxes on its taxable income to the extent it is currently distributed to its stockholders.

As of June 30, 2021, QTS owned approximately 92.3% of the interests in the Operating Partnership. Substantially all of QTS’ assets are held by, and all of QTS’ operations are conducted through, the Operating Partnership. QTS’ interest in the Operating Partnership entitles QTS to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to QTS’ percentage ownership. As the sole general partner of the Operating Partnership, QTS generally has the exclusive power under the partnership agreement of the Operating Partnership to manage and conduct the Operating Partnership’s business and QTS’ board of directors manages the Operating Partnership and the Company’s business and affairs.

Pending Acquisition by Blackstone – As previously announced, on June 7, 2021, the Company and the Operating Partnership entered into an agreement and plan of merger (“Merger Agreement”) with Volt Upper Holdings LLC, a Delaware limited liability company (“Parent”), Volt Lower Holdings LLC, a Delaware limited liability company (“Merger Sub I”), and Volt Acquisition LP, a Delaware limited partnership (“Merger Sub II”). Parent, Merger Sub I and Merger Sub II are affiliates of The Blackstone Group Inc. Pursuant to the Merger Agreement (i) Merger Sub II shall merge with and into the Operating Partnership (the “partnership merger”), with the Operating Partnership being the surviving entity, and immediately following the consummation of the partnership merger, (ii) the Company shall merge with and into Merger Sub I (the “Company merger”), with Merger Sub I being the surviving entity. Pursuant to the Merger Agreement the outstanding shares of common stock of the Company will be acquired for $78 per share in an all-cash transaction. In addition, (i) the outstanding shares of Series A Preferred Stock (other than shares owned by Parent, Merger Sub I or any subsidiary of Parent, the Company or Merger Sub I (such shares, “Excluded Shares”)) shall be automatically converted into the right to receive an amount in cash equal to $25.00 plus any accrued and unpaid dividends, without interest and (ii) the outstanding shares of Series B Preferred Stock (other than Excluded Shares) shall be automatically converted into one Series A preferred unit of Merger Sub I, which shall have terms materially the same as the Series B Preferred Stock.

The Company merger, partnership merger and the other transactions contemplated by the Merger Agreement (the “Merger Transactions”) are subject to customary closing conditions, including approval by the Company’s common stockholders at a special meeting to be held on August 26, 2021. The Merger Transactions are expected to close on the third business day after the conditions to closing are satisfied or waived, including approval of the Company’s stockholders of the merger and other transactions contemplated by the Merger Agreement. The Company can provide no assurances regarding whether the Merger Transactions will close as expected during the third quarter of 2021, or at all. The board of directors of the Company has unanimously approved the Merger Agreement, and has recommended approval of the merger, and the other transactions contemplated by the Merger Agreement, by the Company’s stockholders.

2. Summary of Significant Accounting Policies

Basis of Presentation – The accompanying financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes and management’s discussion and analysis included in our Annual Report on Form 10-K for the year ended December 31, 2020, filed with the SEC on February 26, 2021. The consolidated balance sheet data included herein as of December 31, 2020 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

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As outlined in our Annual Report on Form 10-K for the year ended December 31, 2020, the Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) in accordance with Accounting Standards Codification (“ASC”) Topic 810 Consolidation, and the Company is the primary beneficiary of the VIE. The Company’s only material asset is its ownership interest in the Operating Partnership, and consequently, all of its assets and liabilities represent those assets and liabilities of the Operating Partnership. The Company’s debt is an obligation of the Operating Partnership where the creditors may have recourse, under certain circumstances, against the credit of the Company.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts and deferred tax assets and the valuation of derivatives, real estate assets, acquired intangible assets and certain accruals. The impacts of the COVID-19 pandemic increases uncertainty, which has reduced our ability to use past results to estimate future performance. Accordingly, our estimates and judgments may be subject to greater volatility than has been the case in the past.

Principles of Consolidation – The consolidated financial statements of QTS Realty Trust, Inc. include the accounts of QTS Realty Trust, Inc. and its controlled subsidiaries. All significant intercompany accounts and transactions have been eliminated in the financial statements.

We evaluate our investments in less than wholly owned entities to determine whether they should be recorded on a consolidated basis. The percentage of ownership interest in the entity, an evaluation of control and whether a VIE exists are all considered in our consolidation assessment. Investments in real estate entities which we have the ability to exercise significant influence, but do not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, our share of the earnings or losses of these entities is included in consolidated net income (loss).

Variable Interest Entities (VIEs) – We determine whether an entity is a VIE and, if so, whether it should be consolidated by utilizing judgments and estimates that are inherently subjective. The determination of whether an entity in which we hold a direct or indirect variable interest is a VIE is based on several factors, including whether the entity’s total equity investment at risk upon inception is sufficient to finance the entity’s activities without additional subordinated financial support. We make judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.

We analyze any investments in VIEs to determine if we are the primary beneficiary. In evaluating whether we are the primary beneficiary, we evaluate our direct and indirect economic interests in the entity. 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, construction and other operating decisions and activities. In addition, we consider the rights of other investors to participate in those decisions, to replace the manager and to sell or liquidate the entity. We determine whether we are the primary beneficiary of a VIE at the time we become involved with a variable interest entity and reconsider that conclusion upon a reconsideration event. As of June 30, 2021, we had one unconsolidated entity that was considered a VIE for which we are not the primary beneficiary. Our maximum exposure to losses associated with this VIE is limited to our net investment, which was approximately $12.4 million as of June 30, 2021.

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Real Estate Assets – Real estate assets are reported at cost. All capital improvements for the income-producing properties that extend their useful lives are capitalized to individual property improvements and depreciated over their estimated useful lives. Depreciation for real estate assets is generally provided on a straight-line basis over 40 years from the date the property was placed in service. Property improvements are depreciated on a straight-line basis over the life of the respective improvement ranging from 20 to 40 years from the date the components were placed in service. Leasehold improvements are depreciated over the lesser of 20 years or through the end of the respective life of the lease. Repairs and maintenance costs are expensed as incurred. For the three months ended June 30, 2021, depreciation expense related to real estate assets and non-real estate assets was $45.4 million and $3.2 million, respectively, for a total of $48.7 million. For the three months ended June 30, 2020, depreciation expense related to real estate assets and non-real estate assets was $34.7 million and $3.4 million, respectively, for a total of $38.0 million. For the six months ended June 30, 2021, depreciation expense related to real estate assets and non-real estate assets was $88.1 million and $6.1 million, respectively, for a total of $94.2 million. For the six months ended June 30, 2020, depreciation expense related to real estate assets and non-real estate assets was $67.0 million and $6.7 million, respectively, for a total of $73.7 million. We capitalize certain real estate development costs, including internal costs incurred in connection with development. The capitalization of costs during the construction period (including interest and related loan fees, property taxes and other direct and indirect project costs) begins when development efforts commence and ends when the asset is ready for its intended use. The capitalization of internal costs increases construction in progress recognized during development of the related property and the cost of the real estate asset when placed into service and such costs are depreciated over its estimated useful life. Capitalization of such costs, excluding interest, aggregated to $7.0 million and $4.8 million for the three months ended June 30, 2021 and 2020, respectively, and $12.5 million and $9.3 million for the six months ended June 30, 2021 and 2020, respectively. Interest is capitalized during the period of development by applying our weighted average effective borrowing rate to the actual development and other capitalized costs paid during the construction period. Interest is capitalized until the property is ready for its intended use. Interest costs capitalized totaled $7.8 million and $7.7 million for the three months ended June 30, 2021 and 2020, respectively, and $14.8 million and $15.8 million for the six months ended June 30, 2021 and 2020, respectively.

Acquisitions and Sales – Acquisitions of real estate and other entities are either accounted for as asset acquisitions or business combinations depending on facts and circumstances.

In developing estimates of fair value of acquired assets and assumed liabilities, management analyzes a variety of factors including market data, estimated future cash flows of the acquired operations, industry growth rates, current replacement cost for fixed assets and market rate assumptions for contractual obligations. Such a valuation requires management to make significant estimates and assumptions, particularly with respect to the intangible assets.

Impairment of Long-Lived Assets, Intangible Assets and Goodwill – We review our long-lived assets, intangible assets and equity method investments for impairment when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Recoverability of assets to be held and used is measured by comparison of the carrying amount to the future net cash flows, undiscounted and without interest, expected to be generated by the asset group. If the net carrying value of the asset group exceeds the value of the undiscounted cash flows, the fair value of the asset group is assessed and may be considered impaired. An impairment loss is recognized based on the excess of the carrying amount of the impaired asset over its fair value. No impairment losses were recorded for the three and six months ended June 30, 2021 and June 30, 2020.

The fair value of goodwill is the consideration transferred in a business combination which is not allocable to identifiable intangible and tangible assets. Goodwill is subject to at least an annual assessment for impairment. In connection with the goodwill impairment evaluation that we performed as of October 1, 2020, we determined qualitatively that it is not more likely than not that the fair value of our one reporting unit was less than the carrying amount, thus we did not perform a quantitative analysis. As we continue to operate and assess our goodwill at the consolidated level for our single reporting unit and our market capitalization significantly exceeds our net asset value, further analysis was not deemed necessary as of June 30, 2021.

Cash and Cash Equivalents – We consider all demand deposits and money market accounts purchased with a maturity date of three months or less at the date of purchase to be cash equivalents. Our account balances at one or more institutions periodically exceed the Federal Deposit Insurance Corporation (“FDIC”) insurance coverage and, as a result, there is concentration of credit risk related to amounts on deposit in excess of FDIC coverage. We mitigate this risk by depositing a majority of our funds with several major financial institutions. We also have not experienced any losses and do not believe that the risk is significant.

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Revenue Recognition – We derive our revenues from leases with customers for data center space which include lease components and nonlease revenue components, such as power, tenant recoveries, and managed services. We have elected the available practical expedient under ASC Topic 842, Leases, to combine our nonlease revenue components that have the same pattern of transfer as the related operating lease component into a single combined lease component. 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. In our contracts, the single combined component is accounted for under ASC Topic 842 as the lease component is the predominant component.

A description of each of our disaggregated revenue streams is as follows:

Rental Revenue

Our leases with customers are classified as operating leases and rental revenue is recognized on a straight-line basis over the customer lease term. Occasionally, customer leases include options to extend or terminate the lease agreements. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or recognizing rental revenue unless it is reasonably certain the customer will exercise these extension or termination options.

Rental revenue also includes revenue from power delivery on fixed power arrangements, whereby customers are billed and pay a fixed monthly fee per committed available amount of connected power. These fixed power arrangements require us to provide a series of distinct services and to stand ready to deliver the power over the contracted term which is co-terminus with the lease. Customer fixed power arrangements have the same pattern of transfer over the lease term as the lease component and are therefore combined with the lease component to form a single lease component that is recognized over the term of the lease on a straight-line basis.

In addition, rental revenue includes straight-line rent. Straight-line rent represents the difference in rents recognized during the period versus amounts contractually due pursuant to the underlying leases and is recorded as deferred rent receivable/payable in the consolidated balance sheets. For lease agreements that provide for scheduled rent increases, rental income is recognized on a straight-line basis over the non-cancellable term of the leases, which commences when control of the space has been provided to the customer. The amount of the straight-line rent receivable on the balance sheet included in rents and other receivables, net was $78.9 million and $63.6 million as of June 30, 2021 and December 31, 2020, respectively.

Rental revenue also includes amortization of set-up fees which are amortized over the term of the respective lease as discussed below in the "Deferred Income" section.

Variable Lease Revenue from Recoveries

Certain customer leases contain provisions under which customers reimburse us for power and cooling-related charges as well as a portion of the property’s real estate taxes, insurance and other operating expenses. Recoveries of power and cooling-related expenses relate specifically to our variable power arrangements, whereby customers pay variable monthly fees for the specific amount of power utilized at the current utility rates. Our performance obligation is to stand ready to deliver power over the life of the customer contract up to a contracted power capacity. Customers have the flexibility to increase or decrease the amount of power consumed, and therefore sub-metered power revenue is constrained at contract inception. The reimbursements are included in revenue as recoveries from customers and are recognized each month as the uncertainty related to the consideration is resolved (i.e. we provide power to our customers) and customers utilize the power. Reimbursement of real estate taxes, insurance, common area maintenance, or other operating expenses are accounted for as variable payments under lease guidance pursuant to the practical expedient and are recognized as revenue in the period that the expenses are recognized. Variable lease revenue from recoveries discussed above, including power, common area maintenance or other operating costs, have the same pattern of transfer over the lease term as the lease component and are therefore combined with the lease component to form a single lease component. Variable lease revenue from recoveries is included within the “rental” line item on the statements of operations.

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Other Revenue

Other revenue primarily consists of revenue from our managed service offerings, as well as revenue earned from partner channel fees, management fees and development fees. We, through our taxable REIT subsidiaries (“TRS”), may provide use of our managed services to our customers on an individual or combined basis. In our managed services offering, the TRS’s performance obligation is to provide services (e.g. cloud hosting, data backup, data storage or data center personnel labor hours) to facilitate a fully integrated information technology (“IT”) outsourcing environment over a contracted term. Although underlying services may vary, over the contracted term monthly service offerings are substantially the same and we account for the services as a series of distinct services in accordance with ASC Topic 606. Service fee revenue is recognized as the revenue is earned, which generally coincides with the services being provided. As we have the right to consideration from customers in an amount that corresponds directly with the value to the customer of the TRS’s performance of providing continuous services, we recognize monthly revenue for the amount invoiced.

With respect to the transaction price allocated to remaining performance obligations within our managed service contracts, we have elected to use the optional exemption provided by ASC Topic 606 whereby we are not required to estimate the total transaction price allocated to remaining performance obligations as we apply the “right-to-invoice” practical expedient. As described above, the nature of our performance obligation in these contracts is to provide monthly services that are substantially the same and accounted for as a series of distinct services. These contracts generally have a remaining term ranging from month-to-month to three years.

Management fees and other revenues are generally received from our unconsolidated entity properties as well as third parties. Management fee revenue is earned based on a contractual percentage of unconsolidated entity property revenue. Development fee revenue is earned on a contractual percentage of hard costs to develop a property. We recognize revenue for these services provided when earned based on the performance criteria in ASC Topic 606, with such revenue recorded in “Other” revenue on the consolidated statements of operations.

Leases as Lessee – We determine if an arrangement is a lease at inception. If the contract is considered a lease, we evaluate leased property to determine whether the lease should be classified as a finance or operating lease in accordance with U.S. GAAP. We periodically enter into finance leases for certain data center facilities, equipment, and fiber optic transmission cabling. Finance lease assets are included within the “Buildings, improvements and equipment” line item of the consolidated balance sheets and finance lease liabilities are included within “Finance leases” line item of the consolidated balance sheets. In addition, we lease certain real estate (primarily land or real estate space) under operating lease agreements with such assets included within the “Operating lease right of use assets, net” line item of the consolidated balance sheets and the associated lease liabilities included within the “Operating lease liabilities” line item on the consolidated balance sheets.

Right of use (“ROU”) assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Certain of our leases include variable payments, which may vary based upon changes in facts or circumstances after the start of the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As our leases as lessee typically do not provide an implicit rate, we use our incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. We assess multiple variables when determining the incremental borrowing rate, such as lease term, payment terms, collateral, economic conditions, and creditworthiness. ROU assets also include any lease payments made and exclude lease incentives. Many of our lease agreements include options to extend the lease, which we do not include in our expected lease terms unless they are reasonably certain to be exercised. Rental expense for lease payments related to operating leases is recognized on a straight-line basis over the lease term.

Allowance for Uncollectible Accounts Receivable – We record a provision for uncollectible accounts if a receivable balance relating to lease components from an individual contract is considered by management not to be probable of collection, and this provision is recorded as a reduction to leasing revenues. We also record a general provision of estimated uncollectible tenant receivables based on general probability of collection in accordance with ASC 450-20 Loss Contingencies. This provision is recorded as bad debt expense and recorded within the “Property Operating Costs” line item of the consolidated statements of operations. The aggregate allowance for doubtful accounts on the consolidated balance sheets was $4.6 million and $5.4 million as of June 30, 2021 and December 31, 2020, respectively.

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Deferred Income – Deferred income generally results from non-refundable charges paid by the customer at lease inception to prepare their space for occupancy. We record this initial payment, commonly referred to as set-up fees, as a deferred income liability which amortizes into rental revenue over the term of the related lease on a straight-line basis. Deferred income was $115.0 million and $85.4 million as of June 30, 2021 and December 31, 2020, respectively. Additionally, $7.2 million and $4.5 million of deferred income was amortized into revenue for the three months ended June 30, 2021 and 2020, respectively, and $13.7 million and $8.4 million for the six months ended June 30, 2021 and 2020, respectively.

Equity-based Compensation – Equity-based compensation costs are measured based upon their estimated fair value on the date of grant or modification and amortized ratably over their respective service periods. We have elected to account for forfeitures as they occur. Equity-based compensation expense was $7.3 million and $6.1 million for the three months ended June 30, 2021 and 2020, respectively, and $14.2 million and $11.0 million for the six months ended June 30, 2021 and 2020, respectively.

Segment Information – We manage our business as one operating segment and thus one reportable segment consisting of a portfolio of investments in multiple data centers.

Customer Concentrations – During the six months ended June 30, 2021, one of our customers exceeded 10% of total revenues, representing approximately 15% of total revenues for the six months ended June 30, 2021.

As of June 30, 2021, four of our customers exceeded 5% of trade accounts receivable (which excludes straight-line rent receivables). In aggregate, these four customers accounted for approximately 56% of trade accounts receivable. Two of these customers individually exceeded 10% of total trade accounts receivable representing 44% of total trade accounts receivable.

Income Taxes – We provide for income taxes during interim periods based on the estimated effective tax rate for the year and any discrete adjustments. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the taxable REIT subsidiaries, tax law changes, and future business acquisitions or divestitures. The taxable subsidiaries’ effective tax rates were (16.2)% and 1.2% for the six months ended June 30, 2021 and 2020, respectively.

Fair Value Measurements – ASC Topic 820, Fair Value Measurement, emphasizes that fair value is a market-based measurement, not an entity-specific measurement. Therefore, a fair value measurement should be determined based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering market participant assumptions in fair value measurements, a fair value hierarchy is established that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy).

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates, foreign exchange rates, and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, which are typically based on an entity’s own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the entire fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment, and considers factors specific to the asset or liability.

As of June 30, 2021, we valued our derivative instruments primarily utilizing Level 2 inputs. See Note 14 – ‘Fair Value of Financial Instruments’ for additional details.

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New Accounting Pronouncements

In January 2020, the FASB issued ASU 2020-1, Investments—Equity Securities (Topic 321), Investments—Equity Method and Joint Ventures (Topic 323), and Derivatives and Hedging (Topic 815): Clarifying the Interactions between Topic 321, Topic 323, and Topic 815, which clarifies the interaction between the accounting for equity securities under Topic 321, the accounting for equity method investments in Topic 323, and the accounting for certain forward contracts and purchased options in Topic 815. ASU 2020-1 is effective for fiscal years beginning after December 15, 2020, and interim periods within those fiscal years. We adopted this ASU effective January 1, 2021, and the provisions of the standard did not have a material impact on our consolidated financial statements.

In March 2020, the FASB issued ASU 2020-4, Reference Rate Reform (Topic 848): Facilitation of the Effects of Reference Rate Reform on Financial Reporting. ASU 2020-4 contains practical expedients for reference rate reform related activities that impact debt, leases, derivatives and other contracts. The guidance in ASU 2020-4 is optional and may be elected over time as reference rate reform activities occur. The standard is effective for all entities as of March 12, 2020 through December 31, 2022. An entity can elect to apply the amendments as of any date from the beginning of an interim period that includes or is subsequent to March 12, 2020, or prospectively from a date within an interim period that includes or is subsequent to March 12, 2020, up to that date that the financial statements are available to be issued. In January 2021, the FASB issued ASU 2021-1 Reference Rate Reform (Topic 848): Scope, which updated the standard to clarify that certain optional expedients and exceptions in Topic 848 for contract modifications and hedge accounting apply to derivatives that are affected by the discounting transition. Beginning in the first quarter of 2020, we have applied the hedge accounting expedients related to probability and the assessments of effectiveness for future LIBOR-indexed cash flows to assume that the index upon which future hedged transactions will be based matches the index on the corresponding derivatives. Application of these expedients preserves the presentation of derivatives consistent with past presentation. We continue to evaluate the impact of the guidance but we do not expect the provisions of the standard will have a material impact on our consolidated financial statements.

In April 2021, the FASB issued ASU 2021-04, Earnings Per Share (Topic 260), Debt—Modifications and Extinguishments (Subtopic 470-50), Compensation—Stock Compensation (Topic 718), and Derivatives and Hedging—Contracts in Entity’s Own Equity (Subtopic 815-40). The guidance requires issuers to account for modifications or exchanges of freestanding equity-classified written call options that remain equity classified after the modification or exchange based on the economic substance of the modification or exchange. Under the guidance, an issuer determines the accounting for the modification or exchange based on whether the transaction was done to issue equity, to issue or modify debt, or for other reasons. The guidance is applied prospectively and is effective for all entities for fiscal years beginning after December 15, 2021, and interim periods within those fiscal years. We are currently evaluating the impact of the guidance on our consolidated financial statements.

We determined all other recently issued accounting pronouncements will not have a material impact on our consolidated financial statements or do not materially apply to our operations.

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3. Real Estate Assets and Construction in Progress

The following is a summary of our cost of owned or leased properties as of June 30, 2021 and December 31, 2020 (in thousands):

As of June 30, 2021 (unaudited):


Property Location	Land		Buildings, Improvements and Equipment		Construction in Progress		Total Cost
Ashburn, Virginia Campus (1)	$	26,927	$	428,817	$	203,991	$	659,735
Atlanta, Georgia Campus (2)	55,157		826,547		197,173		1,078,877
Chicago, Illinois	9,400		286,030		110,378		405,808
Dulles, Virginia	3,154		55,749		4,419		63,322
Eemshaven, Netherlands	5,209		23,317		48,588		77,114
Fort Worth, Texas	9,079		128,910		6,625		144,614
Groningen, Netherlands	1,841		12,000		3,440		17,281
Hillsboro, Oregon	18,414		60,396		67,626		146,436
Irving, Texas	8,606		409,950		97,797		516,353
Leased Facilities (3)	—		83,363		462		83,825
Manassas, Virginia Campus (4)	—		100		143,778		143,878
Phoenix, Arizona (5)	—		—		49,111		49,111
Piscataway, New Jersey	7,466		124,760		55,878		188,104
Princeton, New Jersey	20,700		35,297		47		56,044
Richmond, Virginia	2,180		238,323		133,224		373,727
Sacramento, California	1,481		66,756		87		68,324
Santa Clara, California (6)	—		133,418		7,719		141,137
Suwanee, Georgia (Atlanta-Suwanee)	3,521		186,378		9,202		199,101
Other (7)	2,213		38,472		75,249		115,934
	$	175,348	$	3,138,583	$	1,214,794	$	4,528,725

_______________________________

(1)The “Ashburn, Virginia Campus” includes both the existing data center Ashburn, VA (DC - 1) as well as the recently developed data center Ashburn, VA (DC - 2).

(2)The “Atlanta, Georgia Campus” includes both the existing data center Atlanta (DC - 1) as well as the recently developed data center Atlanta, GA (DC - 2).

(3)Includes 6 facilities. All facilities are leased, including one subject to a finance lease.

(4)The “Manassas, Virginia Campus” includes new property development associated with the construction of a wholly owned data center in Manassas, Virginia as well as separate land purchases in Manassas, Virginia.

(5)Represents land purchases. Land acquisition costs, as well as subsequent development costs, are included within construction in progress until development on the land has ended and the asset is ready for its intended use.

(6)Owned facility subject to long-term ground sublease.

(7)Consists of Miami, FL; Lenexa, KS; Overland Park, KS and additional land.

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As of December 31, 2020:


Property Location	Land		Buildings, Improvements and Equipment		Construction in Progress		Total Cost
Ashburn, Virginia Campus (1)	$	16,476	$	371,725	$	185,903	$	574,104
Atlanta, Georgia Campus (2)	55,157		700,142		191,072		946,371
Chicago, Illinois	9,400		250,336		104,117		363,853
Dulles, Virginia	3,154		54,323		4,148		61,625
Eemshaven, Netherlands	5,366		21,712		47,531		74,609
Fort Worth, Texas	9,079		124,054		1,064		134,197
Groningen, Netherlands	1,896		11,206		3,730		16,832
Hillsboro, Oregon	18,414		34,594		78,390		131,398
Irving, Texas	8,606		392,275		99,591		500,472
Leased Facilities (3)	—		82,759		225		82,984
Manassas, Virginia Campus (4)	—		25		67,073		67,098
Phoenix, Arizona (5)	—		—		37,729		37,729
Piscataway, New Jersey	7,466		122,176		30,401		160,043
Princeton, New Jersey	20,700		35,261		5		55,966
Richmond, Virginia	2,180		233,927		120,577		356,684
Sacramento, California	1,481		66,300		12		67,793
Santa Clara, California (6)	—		117,343		9,385		126,728
Suwanee, Georgia (Atlanta-Suwanee)	3,521		184,467		6,718		194,706
Other (7)	2,213		36,636		41,094		79,943
	$	165,109	$	2,839,261	$	1,028,765	$	4,033,135

_______________________________

(1)The “Ashburn, Virginia Campus” includes both the existing data center Ashburn, VA (DC - 1) as well as the recently developed data center Ashburn, VA (DC - 2).

(2)The “Atlanta, Georgia Campus” includes both the existing data center Atlanta (DC - 1) as well as the recently developed data center Atlanta, GA (DC - 2).

(3)Includes 7 facilities. All facilities are leased, including one subject to a finance lease.

(6)Owned facility subject to long-term ground sublease.

(7)Consists of Miami, FL; Lenexa, KS; Overland Park, KS and additional land.

4. Leases

Leases as Lessee

We use leasing as a source of financing for certain data center facilities and related equipment. We currently operate one data center facility, along with various equipment and fiber optic transmission cabling, that are subject to finance leases. The remaining terms of our finance leases range from approximately ten years to twenty years. Our finance lease associated with the data center includes multiple extension option periods, some of which were included in the lease term as we are reasonably certain to exercise those extension options. Our other finance leases typically do not have options to extend the initial lease term.

We currently lease six other facilities under operating lease agreements for various data centers, our corporate headquarters and additional office space. Our leases have remaining lease terms ranging from less than three years to approximately five years. We have options to extend the initial lease term on nearly all of these leases. Additionally, we have one ground lease for our Santa Clara property that is an operating lease which is scheduled to expire in 2052.

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Components of lease expense were as follows (unaudited and in thousands):


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Finance lease cost:
Amortization of assets	$	1,015	$	1,039	$	2,028	$	2,077
Interest on lease liabilities	468		482		937		971
Operating lease expense:
Operating lease cost	2,265		2,239		4,497		4,502
Variable lease cost	286		268		556		532
Sublease income	(49)		(47)		(98)		(95)
Total lease costs	$	3,985	$	3,981	$	7,920	$	7,987

Leases as lessor

Our lease revenue contains both minimum lease payments as well as variable lease payments. See Note 2 ‘Summary of Significant Accounting Policies’ for further details of our revenue streams and associated accounting treatment. The components of our lease revenue were as follows (unaudited and in thousands):


	Three months ended June 30,				Six months ended June 30,
	2021		2020		2021		2020
Lease revenue:
Minimum lease revenue	$	132,574	$	113,147	$	260,280	$	220,632
Variable lease revenue (primarily recoveries from customers)	18,233		12,849		34,835		25,445
Total lease revenue	$	150,807	$	125,996	$	295,115	$	246,077

5. Investments in Unconsolidated Entity

During the three months ended March 31, 2019, we formed an unconsolidated entity with Alinda Capital Partners (“Alinda”), an infrastructure investment firm. We contributed a hyperscale data center under development in Manassas, Virginia to the entity. The facility, and the previously executed 10-year operating lease agreement with a global cloud-based software company, was contributed to the unconsolidated entity in exchange for cash and noncash consideration in the form of equity interest in the entity that was measured at fair value pursuant to Topic 820. The equity interest received and any amounts due from the unconsolidated entity are recorded within our consolidated balance sheets and totaled $12.4 million and $22.6 million as of June 30, 2021 and December 31, 2020, respectively. We and Alinda each own a 50% interest in the entity. As we are not the primary beneficiary of the arrangement but have the ability to exercise significant influence, we concluded that the investment should be accounted for as an unconsolidated entity using equity method investment accounting. As of June 30, 2021 and December 31, 2020, the total assets of the entity were $157.3 million and $141.5 million, respectively. As of June 30, 2021 and December 31, 2020, the total debt outstanding, net of deferred financing costs, was $118.0 million and $90.1 million, respectively.

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6. Debt

Below is a listing of our outstanding debt, including finance leases, as of June 30, 2021 and December 31, 2020 (in thousands):


	Weighted Average Effective Interest Rate at June 30, 2021 (1)	Maturity Date	June 30, 2021		December 31, 2020
	(unaudited)		(unaudited)
Unsecured Credit Facility
Revolving Credit Facility	1.35%	December 17, 2023	$	95,156	$	392,337
Term Loan A	3.26%	December 17, 2024	225,000		225,000
Term Loan B	3.30%	April 27, 2025	225,000		225,000
Term Loan C	3.46%	October 18, 2026	250,000		250,000
Term Loan D	1.45%	January 15, 2026	250,000		250,000
3.875% Senior Notes	3.88%	October 1, 2028	500,000		500,000
Finance Leases	4.36%	2031 - 2041	42,395		41,718
	3.12%		1,587,551		1,884,055
Less net debt issuance costs			(13,307)		(14,562)
Total outstanding debt, net			$	1,574,244	$	1,869,493

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(1)The coupon interest rates associated with Term Loan A, Term Loan B, and Term Loan C incorporate the effects of our interest rate swaps in effect as of June 30, 2021.

The annual remaining principal payment requirements of our debt securities as of June 30, 2021 per the contractual maturities, excluding extension options and excluding operating and finance leases, are as follows (unaudited and in thousands):


2021 (July - December)	$	—
2022	—
2023	95,156
2024	225,000
2025	225,000
Thereafter	1,000,000
Total	$	1,545,156

As of June 30, 2021, we were in compliance with all of our covenants of our debt agreements.

7. Derivative Instruments

From time to time, we enter into derivative financial instruments to manage certain cash flow risks.

Derivatives designated and qualifying as a hedge of the exposure to variability in the cash flows of a specific asset or liability that is attributable to a particular risk, such as interest rate risk, are considered cash flow hedges.

Interest Rate Swaps

Our objectives in using interest rate swaps are to reduce variability in interest expense and to manage exposure to adverse interest rate movements. To accomplish this objective, we primarily use interest rate swaps as part of our interest rate risk management strategy. Interest rate swaps designated as cash flow hedges involve the receipt of variable amounts from a counterparty in exchange for us making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

As of June 30, 2021, we had interest rate swap agreements in place with an aggregate notional amount of $700 million. The forward swap agreements effectively fix the interest rate on $700 million of term loan borrowings, $225 million of swaps allocated to Term Loan A, $225 million allocated to Term Loan B and $250 million allocated to Term Loan C, through the current maturity dates of the respective term loans.

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We reflect our interest rate swap agreements, which are designated as cash flow hedges, at fair value as either assets or liabilities on the consolidated balance sheets within the “Other assets, net” or “Derivative liabilities” line items, as applicable. As of June 30, 2021 and December 31, 2020, the fair value of interest rate swaps represented a net liability of $32.2 million and $49.8 million, respectively.

The forward interest rate swap agreements are derivatives that currently qualify for hedge accounting whereby we record the effective portion of changes in fair value of the interest rate swaps in accumulated other comprehensive income or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized within net income (loss). The amount reclassified from other comprehensive income to interest expense on the consolidated statements of operations was an increase to interest expense of $3.4 million and $2.7 million for the three months ended June 30, 2021, and 2020, respectively, and $6.8 million and $3.5 million for the six months ended June 30, 2021, and 2020, respectively. There was no ineffectiveness recognized for the three and six months ended June 30, 2021, and 2020. During the subsequent twelve months, beginning July 1, 2021, we estimate that $14.3 million will be reclassified from other comprehensive income as an increase to interest expense.

Interest rate derivatives and their fair values as of June 30, 2021 and December 31, 2020 were as follows (unaudited and in thousands):


Notional Amount				Fixed One Month LIBOR rate per annum				Fair Value (1)
June 30, 2021		December 31, 2020				Effective Date	Expiration Date	June 30, 2021		December 31, 2020
$	25,000	$	25,000	1.989	%	January 2, 2018	December 17, 2021	$	(220)	$	(447)
100,000		100,000		1.989	%	January 2, 2018	December 17, 2021	(878)		(1,788)
75,000		75,000		1.989	%	January 2, 2018	December 17, 2021	(659)		(1,342)
50,000		50,000		2.033	%	January 2, 2018	April 27, 2022	(789)		(1,248)
100,000		100,000		2.029	%	January 2, 2018	April 27, 2022	(1,574)		(2,490)
50,000		50,000		2.033	%	January 2, 2018	April 27, 2022	(789)		(1,248)
100,000		100,000		2.617	%	January 2, 2020	December 17, 2023	(5,540)		(7,191)
100,000		100,000		2.621	%	January 2, 2020	April 27, 2024	(6,132)		(8,000)
70,000		70,000		0.968	%	March 2, 2020	October 18, 2026	(324)		(2,174)
30,000		30,000		0.973	%	March 2, 2020	October 18, 2026	(142)		(938)
200,000		200,000		2.636	%	December 17, 2021	December 17, 2023	(8,804)		(9,648)
200,000		200,000		2.642	%	April 27, 2022	April 27, 2024	(8,204)		(9,500)
125,000		125,000		1.014	%	December 17, 2023	December 17, 2024	140		(704)
100,000		100,000		1.035	%	December 17, 2023	December 17, 2024	89		(584)
75,000		75,000		1.110	%	December 17, 2023	October 18, 2026	481		(866)
100,000		100,000		1.088	%	April 27, 2024	April 27, 2025	157		(540)
125,000		125,000		1.082	%	April 27, 2024	April 27, 2025	208		(666)
75,000		75,000		0.977	%	April 27, 2024	October 18, 2026	765		(422)
								$	(32,215)	$	(49,796)

_________________________

(1)The fair value of the derivative financial instruments is presented on a gross basis, whereby positive amounts are presented within the “Other assets, net” and negative amounts are presented within the “Derivative liabilities” line items, as applicable, within the consolidated balance sheets.

Power Purchase Agreements

In March 2019, we entered into two 10-year agreements to purchase renewable energy equal to the expected electricity needs of our data centers in Chicago, Illinois and Piscataway, New Jersey. These arrangements currently qualify for hedge accounting whereby we record the changes in fair value of the instruments in “Accumulated other comprehensive income” or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. The amount reclassified from other comprehensive income to utilities expense on the consolidated statements of operations was an increase to utilities expense of $0.2 million and an increase to utilities expense of $0.4 million for the three months ended June 30, 2021, and 2020, respectively, and an increase to utilities expense of $0.1 million and an increase to utilities expense of $0.8 million for the six months ended June 30, 2021 and 2020, respectively. We currently reflect these agreements, which are designated as cash flow hedges, at fair value as liabilities on the consolidated balance sheets within the “Derivative liabilities” line item.

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Power purchase agreement derivatives and their fair values as of June 30, 2021 and December 31, 2020 were as follows (unaudited and in thousands):


				Fair Value
Counterparty	Facility	Effective Date	Expiration Date	June 30, 2021		December 31, 2020
Calpine Energy Solutions, LLC	Piscataway	March 8, 2019	February 28, 2029	$	(1,118)	$	(2,162)
Calpine Energy Solutions, LLC	Chicago	March 8, 2019	February 28, 2029	496		(1,764)
				$	(622)	$	(3,926)

8. Commitments and Contingencies

We are subject to various routine legal proceedings and other matters in the ordinary course of business. We currently do not have any litigation that would have a material adverse impact on our financial statements.

9. Partners’ Capital, Equity and Incentive Compensation Plans

QualityTech, LP

QTS has the full power and authority to do all the things necessary to conduct the business of the Operating Partnership.

As of June 30, 2021, the Operating Partnership had four classes of limited partnership units outstanding: Series A Preferred Units, Series B Convertible Preferred Units, Class A units of limited partnership interest (“Class A units”) and Class O LTIP units of limited partnership units (“Class O units”). The Class A units currently outstanding are now redeemable on a one-for-one exchange rate at any time for cash or shares of Class A common stock of QTS. The Company may in its sole discretion elect to assume and satisfy the redemption amount with cash or its shares. Class O units were issued upon grants made under the QualityTech, LP 2010 Equity Incentive Plan (the “2010 Equity Incentive Plan”). Class O units are pari passu with Class A units. Each Class O unit is convertible into Class A units by the Operating Partnership at any time or by the holder at any time based on formulas contained in the partnership agreement.

QTS Realty Trust, Inc.

In connection with its initial public offering on October 13, 2013 ("IPO"), QTS issued Class A common stock and Class B common stock. Class B common stock entitles the holder to 50 votes per share and was issued to enable our Chief Executive Officer to exchange 2% of his Operating Partnership units so he may have a vote proportionate to his economic interest in the Company. Also in connection with its IPO, QTS adopted the QTS Realty Trust, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”), pursuant to which the Company may issue shares of Class A common stock pursuant to various types of awards. As of June 30, 2021, 7.9 million shares of Class A common stock were authorized and available for issuance under the 2013 Equity Incentive Plan.

In March 2019, the Compensation Committee completed a redesign of the long-term incentive program for executive officers to include the following types of awards:

a.Performance-Based FFO Unit Awards — performance-based restricted share unit awards, which may be earned based on Operating Funds From Operations (“OFFO”) per diluted share measured over a two-year performance period (performance-based FFO units or “FFO Units”), with two-thirds of the earned FFO Units vesting and settling in shares of Class A common stock on the date that performance is certified following the end of the performance period and the remaining one-third of the FFO Units vesting and settling at the end of three years from the award grant date. The number of shares of Class A common stock subject to the awards that can be earned ranges from 0% to 200% of the target award based on actual performance over the performance period, with the number of shares to be determined based on a linear interpolation basis between threshold and target and target and maximum performance.

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b.Performance-Based Relative TSR Unit Awards — performance-based restricted share unit awards, which may be earned based on total stockholder return (“TSR”) as compared to the MSCI U.S. REIT Index (the “Index”) over a three-year performance period (the performance-based relative TSR units or “TSR Units,” and together with the FFO Units, “performance units”). The number of shares of Class A common stock subject to the awards that can be earned ranges from 0% to 200% of the target award based on our TSR compared to the Index. In addition, award payouts will be determined on a linear interpolation basis between threshold and target and target and maximum performance; and will be capped at the target performance level if our TSR is negative.

c.Restricted Stock Awards — the restricted stock awards vest as to 33% of the shares subject to awards on the first anniversary of the date of grant and as to 8.375% of the shares subject to the awards each quarter-end thereafter, subject to the named executive officer’s continued service as an employee as of each vesting date.

In connection with the closing of the Merger Transactions, immediately prior to the effective time of the merger (the “Effective Time”), each FFO Unit and TSR Unit that is outstanding will automatically become earned and vested with respect to that number of shares of Class A common stock subject to such performance units (including any related accrued dividend equivalents awarded with respect to performance units that were deemed reinvested in additional shares of Class A common stock in accordance with the applicable award agreement governing such units) determined in accordance with the terms of the applicable award agreement, which, in the case of TSR Units, is based on the achievement of the applicable performance goals as measured from the beginning of the applicable performance period through the date immediately prior to the closing date, and, in the case of FFO Units, is deemed earned at the target number of shares subject to the award (each such earned and vested performance unit (including any related dividend equivalents) we refer to as an “earned unit”); provided, however, (i) the FFO Units granted in 2020 will become earned and vest at the maximum level of performance (unless, prior to the Effective Time, Parent and the Company determine, in good faith and taking into account the effects of the occurrence of the transactions contemplated by the Merger Agreement, that, on a pro forma basis, the applicable performance goals would be satisfied at less than maximum performance, in which case such FFO Units will vest based on such actual pro forma performance achievement (but in no event less than target performance)), (ii) any performance units (including any related dividend equivalents) for which the level of performance has previously been determined and certified prior to the date of the Merger Agreement and that remain subject to service-based vesting conditions will, effective immediately prior to the Effective Time, automatically vest and be treated for purposes of the Merger Agreement as an earned unit and (iii) the TSR Units granted to the Company’s Chairman and Chief Executive Officer Chad L. Williams will be earned and vested at the greater of (x) target level or (y) the level of actual achievement of the applicable performance goals set forth in the applicable award agreement as measured from the beginning of the applicable performance period through the date immediately prior to the closing date. At the Effective Time, the earned units will be cancelled in exchange for a cash payment (without interest) in an amount equal to the number of earned units multiplied by $78 (less any applicable income and employment withholding taxes). Any performance units that do not become earned will be cancelled for no consideration immediately prior to the Effective Time.

The following is a summary of award activity under the 2010 Equity Incentive Plan and 2013 Equity Incentive Plan and related information for the six months ended June 30, 2021 (unaudited):


	2010 Equity Incentive Plan					2013 Equity Incentive Plan
	Numbers of Class O units	Weighted average exercise price		Weighted average fair value		Options	Weighted average exercise price		Weighted average fair value		Restricted Stock / Deferred Stock	Weighted average fair value at grant date		TSR Units (2)	Weighted average fair value at grant date		FFO Units (2)	Weighted average fair value at grant date
Outstanding at December 31, 2020	75,435	$	25.00	$	6.11	1,936,407	$	38.55	$	7.26	416,496	$	52.20	168,552	$	66.90	132,267	$	51.45
Granted	—	—		—		96,366	59.06		10.53		271,625	59.09		105,402	64.72		105,402	59.06
Exercised/Vested (1)	—	—		—		(51,220)	38.63		7.91		(171,236)	52.63		—	—		—	—
Cancelled/Expired	—	—		—		—	—		—		(4,305)	57.38		—	—		—	—
Outstanding at June 30, 2021	75,435	$	25.00	$	6.11	1,981,553	$	39.55	$	7.40	512,580	$	55.66	273,954	$	66.06	237,669	$	54.82

____________________

(1)Represents (i) Class O units which were converted to Class A units, (ii) options to purchase Class A common stock which were exercised, and (iii) the Class A common stock that has been released from restriction and which was not surrendered by the holder to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common stock, with respect to the applicable column.

(2)Unmeasured TSR Units and FFO Units are presented in the table herein at 100% of target.

The assumptions and fair values for restricted stock and options to purchase shares of Class A common stock granted for the six months ended June 30, 2021 are included in the following table on a per unit basis (unaudited). Options to purchase shares of Class A common stock were valued using the Black-Scholes model and TSR Units were valued using a Monte-Carlo simulation that leveraged similar assumptions to those used to value the Class A common stock and FFO Units.

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	Six Months Ended June 30, 2021
Fair value of FFO Units and restricted stock granted	$	59.06		-	$	64.20
Fair value of TSR Units granted					$	64.72
Fair value of options granted	$	3.79		-	$	11.36
Expected term (years)	0.4			-	5.5
Expected volatility	28		%	-	31		%
Expected dividend yield	3.39						%
Expected risk-free interest rates	0.06		%	-	0.90		%

The following tables summarize information about awards outstanding as of June 30, 2021 (unaudited).


	Operating Partnership Awards Outstanding
	Exercise prices		Awards outstanding	Weight average remaining vesting period (years)
Class O Units	$	25.00	75,435	—
Total Operating Partnership awards outstanding			75,435


	QTS Realty Trust, Inc. Awards Outstanding
	Exercise prices					Awards outstanding	Weight average remaining vesting period (years)
Restricted stock	—					512,580	0.9
TSR Units	—					273,954	0.9
FFO Units	—					237,669	0.6
Options to purchase Class A common stock	$	21.00	-	$	59.06	1,981,553	0.7
Total QTS Realty Trust, Inc. awards outstanding						3,005,756

Any awards outstanding as of the end of the period have been valued as of the grant date and generally vest ratably over a defined service period. As of June 30, 2021, all restricted Class A common stock, TSR Units, and FFO Units outstanding were unvested and approximately 0.1 million options to purchase Class A common stock were outstanding and unvested. As of June 30, 2021, we had $43.8 million of unrecognized equity-based compensation expense which will be recognized over a remaining weighted-average vesting period of approximately nine months or at the Effective Time. The total intrinsic value of Class O units and options to purchase Class A common stock outstanding at June 30, 2021 was $79.0 million.

Further, pursuant to the Merger Agreement, the Company has suspended the 2020 Amended and Restated QTS Realty Trust, Inc. Employee Stock Purchase Plan (the “Company ESPP”) and no new offering period shall be commenced thereunder unless and until the Merger Agreement is terminated. Subject to the consummation of the Company merger, the Company ESPP shall terminate immediately prior to the Effective Time. Except as otherwise required by the Merger Agreement, applicable law, or an existing Company benefit arrangement, or as permitted by the Merger Agreement or consented to by Parent, the Company is restricted from entering into, adopting, amending in any material respects or terminating any agreements, arrangements, plans or policies related to employee benefits.

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Dividends and Distributions

The following tables present quarterly cash dividends and distributions paid to our common and preferred stockholders for the six months ended June 30, 2021 and 2020 (unaudited):


Six Months Ended June 30, 2021
Record Date	Payment Date	Per Share Rate		Aggregate Dividend/Distribution Amount (in millions)
Common Stock

March 19, 2021	April 6, 2021	$	0.50	$	35.7
December 22, 2020	January 7, 2021	$	0.47	33.4
				$	69.1

Series A Preferred Stock

March 31, 2021	April 15, 2021	$	0.45	$	1.9
December 31, 2020	January 15, 2021	$	0.45	1.9
				$	3.8

Series B Preferred Stock

March 31, 2021	April 15, 2021	$	1.63	$	5.1
December 31, 2020	January 15, 2021	$	1.63	5.1
				$	10.2


Six Months Ended June 30, 2020
Record Date	Payment Date	Per Share Rate		Aggregate Dividend/Distribution Amount (in millions)
Common Stock

March 20, 2020	April 7, 2020	$	0.47	$	31.5
December 20, 2019	January 7, 2020	$	0.44	28.6
				$	60.1

Series A Preferred Stock

March 31, 2020	April 15, 2020	$	0.45	$	1.9
December 31, 2019	January 15, 2020	$	0.45	1.9
				$	3.8

Series B Preferred Stock

March 31, 2020	April 15, 2020	$	1.63	$	5.1
December 31, 2019	January 15, 2020	$	1.63	5.1
				$	10.2

Additionally, subsequent to June 30, 2021, we paid the following dividends:

•On July 7, 2021, we paid our regular quarterly cash dividend of $0.50 per common share to stockholders of record as of the close of business on June 18, 2021.

•On July 15, 2021, we paid a quarterly cash dividend of approximately $0.45 per share on our Series A Preferred Stock to holders of Series A Preferred Stock of record as of the close of business on June 30, 2021.

•On July 15, 2021, we paid a quarterly cash dividend of approximately $1.63 per share on our Series B Preferred Stock to holders of Series B Preferred Stock of record as of the close of business on June 30, 2021.

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Equity Issuances

Class A Common Stock

In June 2019, we established an “at-the-market” equity offering program (the “Prior ATM Program”) pursuant to which we could issue, from time to time, up to $400 million of our Class A common stock, $0.01 par value per share (the “Class A common stock”), which could include shares to be sold on a forward basis. During the three months ended March 31, 2021, we settled the remaining shares subject to the forward sale agreements under the Prior ATM Program.

Because we had utilized substantially all of the offering capacity of the Prior ATM Program, in May 2020, we established a new “at-the-market” equity offering program (the “Current ATM Program”) pursuant to which we may issue, from time to time, up to $500 million of our Class A common stock, which may include shares to be sold on a forward basis. As under the Prior ATM Program, the use of forward sales under the Current ATM Program generally allows us to lock in a price on the sale of shares of our Class A common stock when sold by the forward sellers, but defer receiving the net proceeds from such sales until the shares of our Class A common stock are issued at settlement on a later date. Pursuant to the Merger Agreement, the Company is restricted from issuing common stock under the ATM Program.

In June 2020, we conducted an underwritten offering of 4,400,000 shares of our common stock on a forward basis.

During the three months ended June 30, 2021, we settled 8.2 million shares sold on a forward basis, representing all remaining outstanding forward stock sales from the Current ATM Program and the June 2020 underwritten offering, generating net proceeds of approximately $490.9 million. We have concluded that the forward sale agreements meet the derivative scope exception for certain contracts involving an entity’s own equity. Our earnings per share dilution resulting from the forward sale agreements, if any, is determined using the two-class method.

Preferred Stock

As of June 30, 2021, we had outstanding 4,280,000 shares of 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock ("Series A Preferred Stock") with a liquidation preference of $25.00 per share as well as 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) with a liquidation preference of $100.00 per share. Dividends on the Series A Preferred Stock and Series B Preferred Stock are payable quarterly in arrears on or about the 15th day of each January, April, July and October.

The Series A Preferred Stock does not have a stated maturity date. On and after March 15, 2023, the Company may, at its option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption. Under certain conditions, upon the occurrence of a change of control, we may redeem the Series A Preferred Stock in whole, at any time, or in part, from time to time within 120 days after the occurrence of such event and the holders will have the right to convert their Series A Preferred Stock to Class A common stock in accordance with the terms of the Series A Preferred Stock. On July 30, 2021, and in accordance with the Merger Agreement, we issued a notice of redemption pursuant to which all shares of Series A Preferred Stock that are outstanding following the closing of the Company merger will be redeemed.

The Series B Preferred Stock does not have a stated maturity date. The Series B Preferred Stock is convertible by holders into shares of Class A common stock at any time at the then-prevailing conversion rate. The conversion rate as of June 30, 2021 is 2.1462 shares of the Company’s Class A common stock per share of Series B Preferred Stock. The Series B Preferred Stock is not redeemable by the Company. At any time on or after July 20, 2023, the Company may at its option cause all (but not less than all) outstanding shares of the Series B Preferred Stock to be automatically converted into the Company’s Class A common stock at the then-prevailing conversion rate if the closing sale price of the Company’s Class A common stock is equal to or exceeds 150% of the then-prevailing conversion price for at least 20 trading days in a period of 30 consecutive trading days, including the last trading day of such 30-day period, ending on the trading day prior to the issuance of a press release announcing the mandatory conversion.

On August 2, 2021, the Company issued a notice of fundamental change advising holders that the closing of the Company merger constitutes a “fundamental change” and that pursuant to the Company merger, each outstanding share of Series B Preferred Stock shall be automatically converted into one Series A preferred unit of Merger Sub I, with such Series A preferred units having terms materially the same as the Series B Preferred Stock including that each Series A preferred unit may be converted into cash during the specified period following the partnership merger at the holder’s election in accordance with the terms of such securities.

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10. Related Party Transactions

As described further in Note 5 ‘Investments in Unconsolidated Entity’, during the three months ended March 31, 2019, we formed an unconsolidated entity with Alinda, an infrastructure investment firm. We contributed a hyperscale data center under development in Manassas, Virginia to the entity. The facility, and the previously executed operating lease to a global cloud-based software company pursuant to a 10-year lease agreement, was contributed in exchange for cash and noncash consideration in the form of equity interest in the entity that was measured at fair value pursuant to ASC Topic 820. We and Alinda each own a 50% interest in the entity.

Under the unconsolidated entity operating agreement, we serve as the entity’s operating member, subject to authority and oversight of a board appointed by us and Alinda, and separately we serve as manager and developer of the facility in exchange for management and development fees. During the three months ended June 30, 2021 and 2020, we received $0.6 million and $0.4 million, respectively, in development fees from the unconsolidated entity, and $0.9 million and $0.9 million for the six months ended June 30, 2021 and 2020, respectively. During the three months ended June 30, 2021 and 2020, we received $0.3 million and $0.2 million, respectively, in management fees from the unconsolidated entity, and $0.5 million and $0.4 million for the six months ended June 30, 2021 and 2020, respectively. During the three months ended June 30, 2021, we also received a distribution from the unconsolidated entity that was contemplated in the operating agreement and is classified as an investing cash flow given the nature of the distribution as a return of capital.

In addition, we periodically execute transactions with entities affiliated with our Chairman and Chief Executive Officer. Such transactions include building operating lease payments and receipts as well as reimbursement for the use of a private aircraft service by our officers and directors.

The transactions which occurred during the three and six months ended June 30, 2021 and 2020 are outlined below (unaudited and in thousands):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Tax, utility, insurance and other reimbursement	$	254	$	78	$	423	$	254
Rent expense	260		257		520		514
Total	$	514	$	335	$	943	$	768

11. Noncontrolling Interest

Concurrently with the completion of the IPO, we consummated a series of transactions pursuant to which QTS became the sole general partner and majority owner of QualityTech, LP, which then became its operating partnership. The previous owners of QualityTech, LP retained 21.2% ownership of the Operating Partnership as of the date of the IPO.

Commencing at any time beginning November 1, 2014, at the election of the holders of the noncontrolling interest, the currently outstanding Class A units of the Operating Partnership are redeemable for cash or, at the election of the Company, Class A common stock of the Company on a one-for-one basis. As of June 30, 2021, the noncontrolling ownership interest percentage of QualityTech, LP was 7.7%.

12. Earnings per share

Basic income (loss) per share is calculated by dividing the net income (loss) attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted income (loss) per share adjusts basic income per share for the effects of potentially dilutive common shares. Unvested restricted stock awards and our forward sale contracts described in Note 9 contain non-forfeitable rights to dividends and thus are participating securities and are included in the computation of basic earnings per share pursuant to the two-class method for all periods presented. The two-class method is an earnings allocation formula that treats a participating security as having rights to undistributed earnings that would otherwise have been available to common stockholders. Accordingly, service-based restricted stock awards and the forward sale contracts were included in the calculation of basic earnings per share using the two-class method for all periods presented to the extent outstanding during the period.

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The computation of basic and diluted net income (loss) per share is as follows (in thousands, except per share data, and unaudited):


	Three Months Ended June 30,				Six Months Ended June 30,
	2021		2020		2021		2020
Numerator:
Net income	$	4,199	$	10,209	$	12,117	$	18,329
(Income) loss attributable to noncontrolling interests	251		(317)		172		(427)
Preferred stock dividends	(7,045)		(7,045)		(14,090)		(14,090)
Earnings attributable to participating securities	(2,678)		(5,552)		(7,964)		(7,148)
Net loss available to common stockholders after allocation to participating securities	$	(5,273)	$	(2,705)	$	(9,765)	$	(3,336)
Denominator:
Weighted average shares outstanding - basic	69,338		59,773		66,903		58,900
Effect of Class O units, TSR Units, FFO Units and options to purchase Class A common stock on an "as if" converted basis	—		—		—		—
Weighted average shares outstanding - diluted	69,338		59,773		66,903		58,900

Basic net loss per share *	$	(0.08)	$	(0.05)	$	(0.15)	$	(0.06)

Diluted net loss per share *	$	(0.08)	$	(0.05)	$	(0.15)	$	(0.06)

______________________________

*Note: The calculations of basic and diluted net income (loss) per share above do not include the following number of Class A partnership units, Class O units, TSR Units, FFO Units and options to purchase common stock on an “as if” converted basis, and the effects of Series B Convertible preferred stock on an “as if” converted basis, as their respective inclusions would have been antidilutive:


	Three Months Ended June 30,		Six Months Ended June 30,
	2021	2020	2021	2020
Class A Partnership units	6,440	6,671	6,453	6,671
Class O units, TSR Units, FFO Units and options to purchase common stock on an "as if" converted basis	1,434	1,131	1,372	1,066
Series B Convertible preferred stock on an "as if" converted basis	6,787	6,756	6,783	6,753

13. Contracts with Customers

Future minimum payments to be received under non-cancelable customer contracts including both lease rental revenue components and non-lease revenue components that are accounted for as a combined lease component in accordance with the practical expedient provided by ASC Topic 842 which is discussed in Note 2 above (inclusive of payments for contracts which have not yet commenced, and exclusive of variable lease revenue such as recoveries of operating costs from customers) are as follows for the years ending December 31 (unaudited and in thousands):


2021 (July - December)	$	246,515
2022	430,232
2023	335,884
2024	270,302
2025	210,056
Thereafter	600,928
Total	$	2,093,917

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14. Fair Value of Financial Instruments

ASC Topic 825, Financial Instruments, requires disclosure of fair value information about financial instruments, whether or not recognized in the consolidated balance sheets, for which it is practicable to estimate that value. In cases where quoted market prices are not available, fair values are based upon the application of discount rates to estimated future cash flows based upon market yields or by using other valuation methodologies. Considerable judgment is necessary to interpret market data and develop estimated fair value. Accordingly, fair values are not necessarily indicative of the amounts we could realize on disposition of the financial instruments. The use of different market assumptions and/or estimation methodologies may have a material effect on estimated fair value amounts.

Short-term instruments: The carrying amounts of cash and cash equivalents and restricted cash approximate fair value.

Derivative Contracts:

Interest rate swaps

Currently, we use interest rate swaps to manage our interest rate risk. The valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each derivative. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including interest rate curves. The fair values of interest rate swaps are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future interest rates (forward curves) derived from observable market interest rate curves. To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although we have determined that the majority of the inputs used to value our derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with our derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by us and our counterparties. However, as of June 30, 2021, we assessed the significance of the impact of the credit valuation adjustments on the overall valuation of our derivative positions and determined that the credit valuation adjustments are not significant to the overall valuation of our derivatives. As a result, we have determined that our derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. We do not have any fair value measurements on a recurring basis using significant unobservable inputs (Level 3) as of June 30, 2021 or December 31, 2020.

Power Purchase Agreements

In March 2019, we began using energy hedges to manage risk related to energy prices. The inputs used to value the derivatives primarily fall within Level 2 of the fair value hierarchy, and valuation of these instruments is determined using widely accepted valuation techniques including discounted cash flow analysis on the expected cash flows of each contract. This analysis reflects the contractual terms of the derivatives, including the period to maturity, and uses observable market-based inputs, including futures curves. The fair values of the energy hedges are determined using the market standard methodology of netting the discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). The variable cash payments (or receipts) are based on an expectation of future energy rates (forward curves) derived from observable market futures curves. To comply with the provisions of fair value accounting guidance, we incorporate credit valuation adjustments to appropriately reflect both our own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of our derivative contracts for the effect of nonperformance risk, we have considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Unsecured Credit facility, Term Loan D and 3.875% Senior Notes: As market interest rates have fluctuated compared to contracted interest rates, the fair value of our unsecured credit facility approximated the carrying value of the credit facility less the fair value of the interest rate swap liability. Our Term Loan D did not have interest rates which were materially different than current market conditions and therefore, the fair value approximated the carrying value. The fair value of our 3.875% Senior Notes was estimated using Level 2 “significant other observable inputs,” primarily based on quoted market prices for the same or similar issuances. At June 30, 2021, the fair value of the 3.875% Senior Notes was approximately $533.8 million.

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Finance Leases: The fair value of our finance leases was estimated in the same manner as the unsecured credit facility above. Similarly, each of these instruments did not have interest rates which were materially different than current market conditions and therefore, the fair value of each instrument approximated the respective carrying values.

15. Subsequent Events

In July 2021, we paid our regular quarterly cash dividends on our common stock, Series A Preferred Stock and Series B Preferred Stock. See the ‘Dividends and Distributions’ section of Note 9 for additional details.

On July 30, 2021, and in accordance with the Merger Agreement, we issued a notice of redemption pursuant to which all shares of the Series A Preferred Stock that are outstanding following the closing of the Company merger will be redeemed. In addition, on August 2, 2021, the Company issued a notice of fundamental change advising holders that the closing of the Company merger constitutes a “fundamental change” and that pursuant to the Company merger, each outstanding share of Series B Preferred Stock shall be automatically converted into one Series A preferred unit of Merger Sub I. See the ‘Equity Issuances’ section of Note 9 for additional details.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis covers the financial condition and results of operations of QTS Realty Trust, Inc., for the three and six months ended June 30, 2021 and 2020. You should read the following discussion and analysis in conjunction with QTS' accompanying consolidated financial statements and related notes and “Risk Factors” contained elsewhere in this Form 10-Q.

Forward-Looking Statements

Some of the statements contained in this Form 10-Q constitute forward-looking statements within the meaning of the federal securities laws. Forward-looking statements relate to expectations, beliefs, projections, future plans and strategies, anticipated events or trends and similar expressions concerning matters that are not historical facts. In particular, statements pertaining to the COVID-19 pandemic, its impact on us and our response thereto, the pending acquisition of the Company and our strategy, plans, intentions, capital resources, liquidity, portfolio performance, results of operations, anticipated growth in our funds from operations and anticipated market conditions contain forward-looking statements. In some cases, you can identify forward-looking statements by the use of forward-looking terminology such as “may,” “will,” “should,” “expects,” “intends,” “plans,” “anticipates,” “believes,” “estimates,” “predicts,” or “potential” or the negative of these words and phrases or similar words or phrases which are predictions of or indicate future events or trends and which do not relate solely to historical matters.

The forward-looking statements contained in this Form 10-Q reflect our current views about future events and are subject to numerous known and unknown risks, uncertainties, assumptions and changes in circumstances that may cause our actual results to differ significantly from those expressed in any forward-looking statement. We do not guarantee that the transactions and events described will happen as described (or that they will happen at all). The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements:

•the ability of the Company to obtain stockholder approval required to consummate the proposed acquisition of the Company (the “transaction”), the satisfaction or waiver of other conditions to closing in the definitive agreement for the proposed transaction, unanticipated difficulties or expenditures relating to the proposed transaction, the response of customers and business partners to the announcement of the proposed transaction, potential difficulties in employee retention as a result of the proposed transaction, the occurrence of any event, change or other circumstances that could give rise to the termination of the proposed transaction and the outcome of legal proceedings instituted against the Company, its directors and others related to the proposed transaction

•adverse economic or real estate developments in our markets or the technology industry;

•obsolescence or reduction in marketability of our infrastructure due to changing industry demands;

•global, national and local economic conditions;

•risks related to the COVID-19 pandemic, including, but not limited to, the risk of business and/or operational disruptions, disruption of our customers’ businesses that could affect their ability to make rental payments to us, supply chain disruptions and delays in the construction or development of our data centers;

•risks related to our international operations;

•difficulties in identifying properties to acquire and completing acquisitions;

•our failure to successfully develop, redevelop and operate acquired properties or lines of business

•significant increases in construction and development costs;

•the increasingly competitive environment in which we operate;

•defaults on, or termination or non-renewal of, leases by customers;

•decreased rental rates or increased vacancy rates;

•increased interest rates and operating costs, including increased energy costs;

•financing risks, including our failure to obtain necessary outside financing;

•dependence on third parties to provide Internet, telecommunications and network connectivity to our data centers;

•our failure to qualify and maintain QTS’ qualification as a real estate investment trust (“REIT”);

•environmental uncertainties and risks related to natural disasters;

•financial market fluctuations;

•changes in real estate and zoning laws, revaluations for tax purposes and increases in real property tax rates; and;

•limitations inherent in our current and any future joint venture investments, such as lack of sole-decision making authority and reliance on our partners’ financial condition

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While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it was made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020, and Item 1A. “Risk Factors” of this Form 10-Q, as well as other periodic reports that we file with the Securities and Exchange Commission, many of which should be interpreted as being heightened as a result of the ongoing COVID-19 pandemic and the actions taken to contain the pandemic or mitigate its impact.

Overview

QTS is a leading provider of data center solutions to the world’s largest and most sophisticated hyperscale technology companies, enterprises and government agencies. Through our technology-enabled platform, delivered across mega scale data center infrastructure, we offer a comprehensive portfolio of secure and compliant IT solutions. Our data centers are facilities that power and support our customers’ IT infrastructure equipment and provide seamless access and connectivity to a range of communications and IT services providers. Across our broad footprint of strategically located data centers, we provide flexible, scalable and secure IT solutions, including data center space, power and cooling, connectivity and value-add managed services for more than 1,200 customers in the financial services, healthcare, retail, government, technology and various other industries. We build out our data center facilities depending on the needs of our customers to accommodate both multi-tenant environments (hybrid colocation) and customers that require significant amounts of space and power (hyperscale), including federal customers. We believe that we own and operate one of the largest portfolios of multi-tenant data centers in the United States, as measured by gross square footage, and have the capacity to significantly expand our sellable data center raised floor space without constructing or acquiring any new buildings. In addition, we own approximately 864 acres of land that is available at our data center properties that provides us with the opportunity to significantly expand our capacity to further support future demand from current and new potential customers.

As of June 30, 2021, we operated a portfolio of 28 data center properties located throughout the United States, Canada and Europe. Within the United States, our data centers are concentrated in the markets which we believe offer the highest growth opportunities. Our data centers are highly specialized, mission-critical facilities utilized by our customers to store, power and cool the server, storage, and networking equipment that support their most critical business systems and processes. We believe that our data centers are best-in-class and engineered to adhere to the highest specifications commercially available to customers, providing fully redundant, high-density power and cooling sufficient to meet the needs of the largest companies and organizations in the world. We have demonstrated a strong operating track record of “five-nines” (99.999%) reliability since QTS’ inception.

Pending Acquisition by Blackstone

As previously announced, on June 7, 2021, the Company and the Operating Partnership entered into an agreement and plan of merger (“Merger Agreement”) with Volt Upper Holdings LLC, a Delaware limited liability company (“Parent”), Volt Lower Holdings LLC, a Delaware limited liability company (“Merger Sub I”), and Volt Acquisition LP, a Delaware limited partnership (“Merger Sub II”). Parent, Merger Sub I and Merger Sub II are affiliates of The Blackstone Group Inc. Pursuant to the Merger Agreement (i) Merger Sub II shall merge with and into the Operating Partnership (the “partnership merger”), with the Operating Partnership being the surviving entity, and immediately following the consummation of the partnership merger, (ii) the Company shall merge with and into Merger Sub I (the “Company merger”), with Merger Sub I being the surviving entity. Pursuant to the Merger Agreement the outstanding shares of common stock of the Company will be acquired for $78 per share in an all-cash transaction. In addition, (i) the outstanding shares of Series A Preferred Stock (other than shares owned by Parent, Merger Sub I or any subsidiary of Parent, the Company or Merger Sub I (such shares, “Excluded Shares”)) shall be automatically converted into the right to receive an amount in cash equal to $25.00 plus any accrued and unpaid dividends, without interest and (ii) the outstanding shares of Series B Preferred Stock (other than Excluded Shares) shall be automatically converted into one Series A preferred unit of Merger Sub I, which shall have terms materially the same as the Series B Preferred Stock.

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unanimously approved the Merger Agreement, and has recommended approval of the merger, and the other transactions contemplated by the Merger Agreement, by the Company’s stockholders.

Novel Coronavirus (COVID-19)

We continue to actively monitor developments with respect to COVID-19 and have taken numerous actions based on corporate policies specifically focusing on the safety and wellness of our customers, partners, and employees, as well as providing continuous and resilient services. Although the COVID-19 pandemic has caused significant disruptions to the United States and global economy and has contributed to significant volatility in financial markets, as of the date of this report, these developments have not had a known material adverse effect on our business. As of the date of this report, each of our data centers in North America and Europe are fully operational and operating in accordance with our business continuity plans. Across each of the respective jurisdictions in which we operate, our business has been deemed an essential operation, which has allowed us to remain fully staffed with critical personnel in place to continue to provide service and support for our customers.

The extent to which COVID-19 may impact our and our customers’ operations will depend on future developments, which are highly uncertain and cannot be predicted with confidence, including the duration of the pandemic, new information that may emerge concerning the severity, variants or mutations of COVID-19, vaccine efficacy and rollout and other actions taken to contain COVID-19 or treat its impact, among others. The COVID-19 pandemic presents material uncertainty and risk with respect to our business, financial performance, and results of operations and may exacerbate many of the risks identified under the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2020.

Our Customer Base

Our data center facilities are designed with the flexibility to support a diverse set of solutions and customers. Our customer base is comprised of more than 1,200 different companies of all sizes representing an array of industries, each with unique and varied business models and needs. We serve Fortune 1000 companies as well as small and medium-sized businesses, or SMBs, including financial institutions, healthcare companies, retail companies, government agencies, communications service providers, software companies and global Internet companies.

We have customers that range from large enterprise and technology companies with significant IT expertise and data center requirements, including financial institutions, “Big Four” accounting firms, government agencies and the world’s largest global Internet and cloud companies, to major healthcare, telecommunications and software and web-based companies.

As a result of our diverse customer base, customer concentration in our portfolio is limited. As of June 30, 2021, only six of our more than 1,200 customers individually accounted for more than 3% of our monthly recurring revenue (“MRR”) (as defined below), with the largest customer accounting for approximately 14.6% of our MRR and the next largest customer accounting for 5.2% of our MRR.

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Our Portfolio

As of June 30, 2021, our portfolio consisted of 28 owned and leased properties, including a property owned by an unconsolidated entity, with data centers located throughout the United States, Canada and Europe. The following table presents an overview of our portfolio of operating properties, based on information as of June 30, 2021:


			Net Rentable Square Feet (Operating NRSF) (1)
Properties	Year Acquired (2)	Gross Square Feet (3)	Raised Floor (4)	Office & Other (5)	Supporting Infrastructure (6)	Total	% Occupied (7)		Annualized Rent (8)		Available Utility Power (MW) (9)	Basis of Design ("BOD") NRSF (10)	Current Raised Floor as a % of BOD
Richmond, VA	2010	1,318,353	140,398	51,093	153,449	344,940	83.5	%	$	32,562,651	110	557,309	25	%
Atlanta, GA (DC - 1)	2006	968,695	527,186	36,953	364,815	928,954	98.1	%	123,084,878		72	527,186	100	%
Irving, TX	2013	698,000	224,605	15,300	252,733	492,638	95.7	%	57,374,515		140	275,701	81	%
Princeton, NJ	2014	553,930	58,157	2,229	111,405	171,791	100.0	%	10,558,271		22	158,157	37	%
Atlanta, GA (DC - 2)	2020	495,000	99,118	9,250	90,870	199,238	98.2	%	27,076,030		100	240,000	41	%
Chicago, IL	2014	474,979	127,222	4,931	125,595	257,748	91.1	%	27,632,743		56	215,855	59	%
Ashburn, VA (DC - 1) (11)	2018	445,000	163,125	13,199	169,319	345,643	99.6	%	24,842,959		50	178,000	92	%
Suwanee, GA	2005	369,822	212,975	8,697	107,128	328,800	88.1	%	59,776,332		36	212,975	100	%
Piscataway, NJ	2016	360,000	118,263	19,243	116,289	253,795	95.0	%	25,443,454		111	176,000	67	%
Netherlands facilities (12)	2019	312,114	38,632	—	47,367	85,999	81.7	%	8,295,561		92	158,000	24	%
Ashburn, VA (DC - 2) (13)	2021	310,000	39,204	1,192	27,443	67,839	100.0	%	—		50	169,664	23	%
Fort Worth, TX	2016	261,836	71,147	17,232	125,794	214,173	67.0	%	10,107,749		50	80,000	89	%
Hillsboro, OR	2020	158,000	23,563	1,000	20,240	44,803	81.3	%	4,380,684		30	85,000	28	%
Santa Clara, CA (14)	2007	135,322	62,046	1,238	45,094	108,378	91.4	%	25,944,154		11	80,940	77	%
Sacramento, CA	2012	92,644	54,595	2,794	23,916	81,305	59.1	%	11,671,128		8	54,595	100	%
Dulles, VA (15)	2017	66,751	26,625	—	22,206	48,831	86.2	%	13,267,724		13	44,545	60	%
Leased facilities (16)	2006 & 2015	187,706	59,065	18,650	41,901	119,616	84.0	%	22,277,731		10	79,717	74	%
Other (17)	Misc.	147,435	22,380	98,674	30,074	151,128	79.8	%	10,001,496		5	22,380	100	%
		7,355,587	2,068,306	301,675	1,875,638	4,245,619	92.6	%	$	494,298,060	966	3,316,024	62	%

New Property Development
Manassas, VA (DC - 2) (18)	2021	340,000	—	—	—	—	—	%	—		—	160,000	—	%

Unconsolidated Properties - at the Entity's 100% Share (19)
Manassas, VA (DC - 1)	2018	118,031	33,600	12,663	39,044	85,307	100.0	%	11,164,640		135	66,324	51	%

Total Properties		7,813,618	2,101,906	314,338	1,914,682	4,330,926	92.8	%	$	505,462,700	1,101	3,542,348	59	%

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(1)Represents the total square feet of a building that is currently leased or available for lease plus developed supporting infrastructure, based on engineering drawings and estimates, but does not include space held for redevelopment or space used for our own office space.

(2)With respect to acquisitions, represents the year a property was acquired. With respect to properties under lease, represents the year our initial lease commenced for the property. With respect to new data center construction, represents the year the facility was opened or expected to be opened.

(3)With respect to our owned properties, gross square feet represents the entire building area. With respect to leased properties, gross square feet represents that portion of the gross square feet subject to our lease. Gross square feet includes 424,246 square feet of our office and support space, which is not included in operating NRSF.

(4)Represents management’s estimate of the portion of NRSF of the facility with available power and cooling capacity that is currently leased or readily available to be leased to customers as data center space based on engineering drawings.

(5)Represents the operating NRSF of the facility other than data center space (typically office and storage space) that is currently leased or available to be leased.

(6)Represents required data center support space, including mechanical, telecommunications and utility rooms, as well as building common areas.

(7)Calculated as data center raised floor that is subject to a signed lease for which billing has commenced divided by leasable raised floor based on the current configuration of the properties, expressed as a percentage.

(8)We define annualized rent as MRR multiplied by 12. We calculate MRR as monthly contractual revenue under executed contracts as of a particular date, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from backlog contracts (as defined below) as of a particular date, unless otherwise specifically noted, nor does it reflect the accounting associated with any free rent, rent abatements or future scheduled rent increases.

(9)Represents installed utility power and transformation capacity that is available for use by the facility as of June 30, 2021.

(10)Represents the total sellable data center raised floor potential of the existing data center facility.

(11)This property was formerly known as “Ashburn, VA” but has been renamed “Ashburn, VA (DC - 1)” to distinguish between the existing data center and the recently developed data center shown as “Ashburn, VA (DC - 2).”

(12)Consists of two data centers located in Eemshaven, Netherlands and Groningen, Netherlands.

(13)Represents the recently developed data center in our Ashburn, VA market.

(14)Subject to long-term ground lease.

(15)Consists of one data center in Dulles, Virginia. The Dulles campus previously consisted of two data center buildings, however as of December 31, 2020, the Company relocated customers from the smaller and older facility to the new facility in order to optimize its operating cost structure.

(16)Includes 6 facilities. All facilities are leased, including one subject to a finance lease.

(17)Consists of Miami, FL; Lenexa, KS; and Overland Park, KS facilities.

(18)Represents the development of a new data center building at our Manassas, VA campus. The Manassas, VA (DC - 2) data center is 100% owned and consolidated by QTS and is separate from the Manassas, VA (DC - 1) data center that is owned by the unconsolidated entity.

(19)Represents our unconsolidated entity at 100% share. Our equity ownership of the unconsolidated entity is 50%.

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Factors That May Influence Future Results of Operations and Cash Flows

Revenue. Our revenue growth will depend on our ability to maintain the historical occupancy rates of leasable raised floor, lease currently available space, lease new capacity that becomes available as a result of our development and redevelopment activities, attract new customers and continue to meet the ongoing technological requirements of our customers. As of June 30, 2021, we had in place customer leases generating revenue for approximately 93% of our leasable raised floor. Our ability to grow revenue also will be affected by our ability to maintain or increase rental and managed services rates at our properties. In addition, we also at times may elect to reclaim space from customers in a negotiated transaction where we believe that we can redevelop and/or re-lease that space at higher rates, which may cause a decrease in revenue until the space is re-leased.

Leasing Arrangements. As of June 30, 2021, approximately 54% of our MRR was attributable to the metered power model. Under the metered power model, the customer pays us a fixed monthly rent amount, plus reimbursement of certain other operating costs, including actual costs of sub-metered electricity used to power its data center equipment and an estimate of costs for electricity used to power supporting infrastructure for the data center, expressed as a factor of the customer’s actual electricity usage. Fluctuations in our customers’ utilization of power and the supplier pricing of power do not significantly impact our results of operations or cash flows under the metered power model. These leases generally have a minimum term of five years. As of June 30, 2021, the remaining approximately 46% of our MRR was attributable to the gross lease or managed service model. Under this model, the customer pays us a fixed amount on a monthly basis, and does not separately reimburse us for operating costs, including utilities, maintenance, repair, property taxes and insurance, as reimbursement for these costs is factored into MRR. However, if customers incur more utility costs than their leases permit, we are able to charge these customers for overages. For leases under the gross lease or managed service model, fluctuations in our customers’ utilization of power and the prices our utility providers charge us will impact our results of operations and cash flows. Our gross leases and managed services contracts generally have a term of three years or less.

Scheduled Lease Expirations. Our ability to minimize rental churn (which we define as MRR lost in the period from a customer intending to fully exit our platform in the near-term compared to the total MRR at the beginning of the period) and customer downgrades at renewal, combined with our ability to renew, lease and re-lease expiring space, will impact our results of operations and cash flows. Leases which have commenced billing representing approximately 15% and 24% of our total leased raised floor are scheduled to expire during the years ending December 31, 2021 (including all month-to-month leases) and 2022, respectively. These leases also represented approximately 19% and 28%, respectively, of our annualized rent as of June 30, 2021. Given that our average rent for larger contracts tend to be at or below market rent at expiration, as a general matter, based on current market conditions, we expect that expiring rents will generally be at or below the then-current market rents.

Acquisitions, Development, and Financing. Our revenue growth also will depend on our ability to acquire and redevelop and/or construct and subsequently lease data center space at favorable rates. We generally fund the cost of data center acquisition, construction and/or redevelopment from our net cash provided by operations, revolving credit facility, other unsecured and secured borrowings, joint ventures and/or the issuance of additional equity. We believe that we have sufficient access to capital to fund our development.

Unconsolidated Entity. 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 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. 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 unconsolidated entity based on the expected full stabilization of the asset. These distributions will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the agreement. Under the agreement, we serve as the unconsolidated entity’s operating member, subject to authority and oversight of a board appointed by Alinda and us, and separately we serve as manager and developer of the facility in exchange for management and development fees. The agreement includes various transfer restrictions and rights of first offer that will allow us to repurchase Alinda’s interest should Alinda wish to exit in the future. In addition, we have agreed to provide Alinda an opportunity to invest in future similar entities based on similar terms and at a comparable capitalization rate. This agreement has been reflected as an unconsolidated entity on our reported financial statements beginning in the first quarter of 2019.

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Operating Expenses. Our operating expenses generally consist of direct personnel costs, utilities, property and ad valorem taxes, insurance and site maintenance costs and rental expenses on our ground and building leases. In particular, our buildings require significant power to support the data center operations conducted in them. Although a significant portion of our long-term leases – leases with a term greater than three years – contain reimbursements for certain operating expenses, we will not in all instances be reimbursed for all of the property operating expenses we incur. Increases or decreases in our operating expenses will impact our results of operations and cash flows and we expect to incur additional operating expenses as we continue to expand.

General Leasing Activity

Information is provided in the tables below for both our leasing activity as well as backlog balances.

For new/modified leases signed, “Incremental Annualized Rent, Net of Downgrades” reflect net incremental MRR signed during the period for purposes of tracking incremental revenue contribution. The amounts include renewals when there was a change in square footage rented, but exclude renewals where square footage remained consistent before and after renewal. (See “Renewed Leases” table below for such renewals.) Annualized rent per leased square foot is computed using the total MRR associated with all new and modified leases for the respective periods.

Regarding renewed leases signed, consistent with our strategy and business model, the renewal rates below reflect total MRR per square foot including all subscribed services. For comparability, we include only those leases where the square footage remained consistent before and after renewal. All customers with space changes are incorporated into new/modified leasing statistics and rates.

The following leasing and backlog statistics include results of the consolidated business as well as QTS’ 50% share of revenue from the unconsolidated entity, if any.


	Period	Number of Leases	Annualized rent per leased sq ft (1)		Incremental Annualized Rent (1), Net of Downgrades
New/Modified Leases Signed	Three Months Ended June 30, 2021	468	$	277	$	26,730,104
	Six Months Ended June 30, 2021	987	304		47,335,497

	Period	Number of Renewed Leases	Annualized rent (1) per leased sq ft		Annualized Rent (2)		Rent Change
Renewed Leases (2)	Three Months Ended June 30, 2021	113	$	946	$	14,586,804	7.4%
	Six Months Ended June 30, 2021	241	619		37,579,716		4.2%

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(1)We define annualized rent as MRR as of June 30, 2021, multiplied by 12.

(2)We define renewals as leases where the customer retains the same amount of space before and after renewals, which facilitates rate comparability.

The following tables outline the Company’s backlog (which represents MRR, excluding cost recoveries, for customer leases that have been signed but have not yet commenced as of period end) as of June 30, 2021, both on a GAAP rent and cash rent basis:


Backlog - GAAP rent (1)	2021		2022		Thereafter		Total
MRR	$	2,995,732	$	2,260,957	$	2,200,005	$	7,456,694
Incremental revenue (2)	10,766,155		20,174,110		26,400,060
Annualized revenue (3)	$	35,948,784	$	27,131,484	$	26,400,060	$	89,480,328


Backlog - Cash rent (1)	2021		2022		Thereafter		Total
MRR	$	5,007,779	$	3,661,320	$	4,514,350	$	13,183,449
Incremental revenue (2)	17,093,259		29,716,610		54,172,200
Annualized revenue (3)	$	60,093,348	$	43,935,840	$	54,172,200	$	158,201,388

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(1)Includes our consolidated backlog balance in addition to backlog associated with the unconsolidated entity at QTS’ pro rata share of the backlog revenue. Of the $89.5 million backlog of annualized GAAP rent, approximately $3.1 million related to QTS’ pro rata share of backlog revenue associated with the unconsolidated entity. Of the $158.2 million backlog of annualized cash rent, approximately $3.6 million related to QTS’ pro rata share of backlog revenue associated with the unconsolidated entity.

(2)Incremental revenue represents the expected amount of recognized MRR for the business in the period based on when the backlog leases commence throughout the period.

(3)Annualized revenue represents the backlog MRR multiplied by 12, demonstrating how much recognized MRR would have been recognized if the backlog leases commencing in the period were in place for an entire year.

We estimate the remaining cost to provide the space, power, connectivity and other services to the customer contracts which had not billed as of June 30, 2021 to be approximately $391 million. This estimate generally includes customers with newly contracted space of more than 3,300 square feet of raised floor space. The space, power, connectivity and other services provided to customers that contract for smaller amounts of space is generally provided by utilizing existing space which was previously developed.

Results of Operations

Three Months Ended June 30, 2021 Compared to Three Months Ended June 30, 2020

Changes in revenues and expenses for the three months ended June 30, 2021 compared to the three months ended June 30, 2020 are summarized below (unaudited and in thousands):


	Three Months Ended June 30,
	2021		2020		$ Change		% Change
Revenues:
Rental	$	150,807	$	125,996	$	24,811	20	%
Other	4,413		5,644		(1,231)		(22)	%
Total revenues	155,220		131,640		23,580		18	%
Operating expenses:
Property operating costs	45,704		40,349		5,355		13	%
Real estate taxes and insurance	5,788		4,106		1,682		41	%
Depreciation and amortization	58,255		47,554		10,701		23	%
General and administrative	24,476		21,391		3,085		14	%
Transaction and integration costs	8,391		381		8,010		2,102	%
Total operating expenses	142,614		113,781		28,833		25	%
Operating income	12,606		17,859		(5,253)		(29)	%
Other income and expense:
Interest income	1		2		(1)		(50)	%
Interest expense	(7,452)		(6,924)		528		8	%
Equity in net loss of unconsolidated entity	(705)		(590)		115		19	%
Income before taxes	4,450		10,347		(5,897)		(57)	%
Tax expense	(251)		(138)		113		82	%
Net income	$	4,199	$	10,209	$	(6,010)	(59)	%

Revenues. Total revenues for the three months ended June 30, 2021 were $155.2 million compared to $131.6 million for the three months ended June 30, 2020. The increase of $23.6 million, or 18%, was largely attributable to growth in our hyperscale and hybrid colocation offerings primarily through increases in revenues at our Ashburn (DC - 1), Atlanta (DC - 1) and Chicago facilities, as well as the opening of our Atlanta (DC - 2) facility.

Property Operating Costs. Property operating costs for the three months ended June 30, 2021 were $45.7 million compared to property operating costs of $40.3 million for the three months ended June 30, 2020, an increase of $5.4 million, or 13%.

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The breakdown of our property operating costs is summarized in the table below (unaudited and in thousands):


	Three Months Ended June 30,
	2021		2020		$ Change		% Change
Property operating costs:
Direct payroll	$	6,774	$	6,939	$	(165)	(2)	%
Rent	2,436		2,717		(281)		(10)	%
Repairs and maintenance	4,285		3,360		925		28	%
Utilities	21,601		16,307		5,294		32	%
Management fee allocation	5,701		4,828		873		18	%
Other	4,907		6,198		(1,291)		(21)	%
Total property operating costs	$	45,704	$	40,349	$	5,355	13	%

The increase in total property operating costs was primarily due to increased utilities expense, repairs and maintenance expense and management fee allocation resulting from ongoing company growth. The increase in utility costs was primarily driven by increased power utility expenses primarily at the Atlanta (DC - 1) and Suwanee facilities, as well as the opening of our Atlanta (DC - 2) facility. Offsetting these increases was a reduction in general bad debt reserves attributable to a higher level of bad debt expense in the prior year associated with the risk of a loss across our portfolio of lease receivables primarily related to customers that experienced business disruptions due to COVID-19 in the second quarter of 2020, which is included in the “Other” line item of the property operating costs table, as well as a reduction in rent expense primarily related to the exit of portions of leased facilities as customers churned, downgraded or migrated to our owned facilities.

Real Estate Taxes and Insurance. Real estate taxes and insurance for the three months ended June 30, 2021 were $5.8 million compared to $4.1 million for the three months ended June 30, 2020. The increase of $1.7 million, or 41%, was primarily attributable to an increase in real estate taxes associated with the in servicing of certain data center facilities and increased assessed property values at our Atlanta (DC - 1) and Fort Worth facilities.

Depreciation and Amortization. Depreciation and amortization for the three months ended June 30, 2021 was $58.3 million compared to $47.6 million for the three months ended June 30, 2020. The increase of $10.7 million, or 23%, was primarily due to additional depreciation expense relating to an increase in assets placed in service at our Ashburn (DC - 1), Chicago and Irving facilities, as well as the opening of our Atlanta (DC - 2) facility.

General and Administrative Expenses. General and administrative expenses were $24.5 million for the three months ended June 30, 2021 compared to $21.4 million for the three months ended June 30, 2020, an increase of $3.1 million, or 14%. The increase was primarily attributable to an increase in total compensation expense, the majority of which related to increased equity-based compensation expense associated with the growth of the Company and anticipated achievement of certain performance metrics of outstanding equity awards, as well as an increase in expenses related to travel and corporate events following limited activity in the prior year due to COVID-19.

Transaction and Integration Costs. Transaction and integration costs were $8.4 million for the three months ended June 30, 2021, compared to $0.4 million for the three months ended June 30, 2020. The increase of $8.0 million was primarily attributable to transaction costs recognized during the three months ended June 30, 2021 associated with the potential pending merger. See the "Pending Acquisition by Blackstone" section above for further details.

Interest Expense. Interest expense for the three months ended June 30, 2021 was $7.5 million compared to $6.9 million for the three months ended June 30, 2020. The increase in interest expense was primarily attributable to an increase in our average total debt balance from the prior period, partially offset by a decrease in our average interest rates from the prior period.

Equity in net loss of unconsolidated entity. This represents equity in earnings (loss) of our unconsolidated entity formed during the first quarter of 2019 that owns our Manassas (DC - 1) data center. Equity in net loss was $0.7 million for the three months ended June 30, 2021, which remained consistent with a net loss of $0.6 million for the three months ended June 30, 2020.

Tax Expense. Tax expense for the three months ended June 30, 2021 was $0.3 million which remained consistent when compared to $0.1 million of tax expense for the three months ended June 30, 2020.

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Six Months Ended June 30, 2021 Compared to Six Months Ended June 30, 2020

Changes in revenues and expenses for the six months ended June 30, 2021 compared to the six months ended June 30, 2020 are summarized below (unaudited and in thousands):


	Six Months Ended June 30,
	2021		2020		$ Change		% Change
Revenues:
Rental	$	295,115	$	246,077	$	49,038	20	%
Other	8,837		11,855		(3,018)		(25)	%
Total revenues	303,952		257,932		46,020		18	%
Operating expenses:
Property operating costs	91,988		81,130		10,858		13	%
Real estate taxes and insurance	10,810		8,017		2,793		35	%
Depreciation and amortization	113,761		92,624		21,137		23	%
General and administrative	48,117		42,074		6,043		14	%
Transaction and integration costs	9,907		597		9,310		1,559	%
Total operating expenses	274,583		224,442		50,141		22	%
Operating income	29,369		33,490		(4,121)		(12)	%
Other income and expense:
Interest income	1		2		(1)		(63)	%
Interest expense	(15,600)		(14,086)		1,514		11	%
Other income	—		159		(159)		(100)	%
Equity in net loss of unconsolidated entity	(1,264)		(1,267)		(3)		0	%
Income before taxes	12,506		18,298		(5,792)		(32)	%
Tax benefit (expense)	(389)		31		420		(1,355)	%
Net income	$	12,117	$	18,329	$	(6,212)	(34)	%

Revenues. Total revenues for the six months ended June 30, 2021 were $304.0 million compared to $257.9 million for the six months ended June 30, 2020. The increase of $46.0 million, or 18%, was largely attributable to growth in our hyperscale and hybrid colocation offerings primarily through increases in revenues at our Ashburn (DC - 1), Atlanta (DC - 1) and Chicago facilities, as well as the opening of our Atlanta (DC - 2) facility.

Property Operating Costs. Property operating costs for the six months ended June 30, 2021 were $92.0 million compared to property operating costs of $81.1 million for the six months ended June 30, 2020, an increase of $10.9 million, or 13%.

The breakdown of our property operating costs is summarized in the table below (unaudited and in thousands):


	Six Months Ended June 30,
	2021		2020		$ Change		% Change
Property operating costs:
Direct payroll	$	13,764	$	13,467	$	297	2	%
Rent	4,835		5,466		(631)		(12)	%
Repairs and maintenance	8,697		6,699		1,998		30	%
Utilities	42,581		31,295		11,286		36	%
Management fee allocation	11,178		9,505		1,673		18	%
Other	10,933		14,698		(3,765)		(26)	%
Total property operating costs	$	91,988	$	81,130	$	10,858	13	%

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The increase in total property operating costs was primarily due to increased utilities expense, repairs and maintenance expense, management fee allocation and direct payroll costs resulting from ongoing company growth. The increase in utility costs was primarily driven by increased power utility expenses primarily at the Atlanta (DC - 1), Suwanee and Chicago facilities, as well as the opening of our Atlanta (DC - 2) facility. Offsetting these increases was a reduction in general bad debt reserves attributable to a higher level of bad debt expense in the prior year associated with the risk of a loss across our portfolio of lease receivables primarily related to customers that experienced business disruptions due to COVID-19 in the first and second quarters of 2020, which is included in the “Other” line item of the property operating costs table, as well as a reduction in rent expense primarily related to the exit of portions of leased facilities as customers churned, downgraded or migrated to our owned facilities.

Real Estate Taxes and Insurance. Real estate taxes and insurance for the six months ended June 30, 2021 were $10.8 million compared to $8.0 million for the six months ended June 30, 2020. The increase of $2.8 million, or 35%, was primarily attributable to an increase in real estate taxes associated with the in servicing of certain data center facilities and increased assessed property values at our Atlanta (DC - 1), Ashburn (DC - 1) and Fort Worth facilities.

Depreciation and Amortization. Depreciation and amortization for the six months ended June 30, 2021 was $113.8 million compared to $92.6 million for the six months ended June 30, 2020. The increase of $21.1 million, or 23%, was primarily due to additional depreciation expense relating to an increase in assets placed in service at our Ashburn (DC - 1), Chicago, Irving and Atlanta (DC - 1) facilities, as well as the opening of our Atlanta (DC - 2) facility.

General and Administrative Expenses. General and administrative expenses were $48.1 million for the six months ended June 30, 2021 compared to $42.1 million for the six months ended June 30, 2020, an increase of $6.0 million, or 14%. The increase was primarily attributable to an increase in total compensation expense, the majority of which related to increased equity-based compensation expense associated with the growth of the Company and anticipated achievement of certain performance metrics of outstanding equity awards, as well as increases in charitable contributions and software licenses.

Transaction and Integration Costs. Transaction and integration costs were $9.9 million for the six months ended June 30, 2021, compared to $0.6 million for the six months ended June 30, 2020. The increase of $9.3 million was primarily attributable to transaction costs recognized during the six months ended June 30, 2021 associated with the potential pending merger. See the "Pending Acquisition by Blackstone" section above for further details.

Interest Expense. Interest expense for the six months ended June 30, 2021 was $15.6 million compared to $14.1 million for the six months ended June 30, 2020. The increase in interest expense was primarily attributable to an increase in our average total debt balance from the prior period as well as a lower level of capitalized interest during the current period, which was driven by a reduction in interest rates.

Other Income. Other income represents the impact of foreign currency exchange rate fluctuations on the value of our net investments in foreign subsidiaries whose functional currencies are other than the U.S. Dollar. We recognized no foreign currency gain (loss) related to our investment in the Netherlands facilities during the six months ended June 30, 2021. Prior to February 2020, gains or losses from foreign currency transactions related to our investment in the Netherlands facilities were included in determining net income (loss). In February 2020, we entered into a net investment hedge which resulted in gains or losses subsequently being recognized in Other Comprehensive Income (Loss).

Equity in net loss of unconsolidated entity. This represents equity in earnings (loss) of our unconsolidated entity formed during the first quarter of 2019 that owns our Manassas (DC - 1) data center. Equity in net loss was $1.3 million for the six months ended June 30, 2021, which remained consistent with a net loss of $1.3 million for the six months ended June 30, 2020.

Tax Benefit (Expense). Tax expense for the six months ended June 30, 2021 was $0.4 million which remained consistent when compared to less than $0.1 million of tax benefit for the six months ended June 30, 2020.

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Non-GAAP Financial Measures

We consider the following non-GAAP financial measures to be useful to investors as key supplemental measures of our performance: (1) FFO; (2) Operating FFO; (3) Adjusted Operating FFO; (4) MRR and Recognized MRR; (5) NOI; (6) EBITDAre; and (7) Adjusted EBITDA. These non-GAAP financial measures should be considered along with, but not as alternatives to, net income or loss and cash flows from operating activities as a measure of our operating performance. FFO, Operating FFO, Adjusted Operating FFO, MRR, NOI, EBITDAre and Adjusted EBITDA, as calculated by us, may not be comparable to similarly titled measures as reported by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us.

We do not, nor do we suggest investors should, consider such non-GAAP financial measures in isolation from, or as a substitute for, GAAP financial information. We believe the presentation of non-GAAP financial measures provide meaningful supplemental information to both management and investors that is indicative of our operations. We have included a reconciliation of this additional information to the most comparable GAAP measure below.

FFO, Operating FFO and Adjusted Operating FFO

We consider funds from operations (“FFO”) to be a supplemental measure of our performance which should be considered along with, but not as an alternative to, net income (loss) and cash provided by operating activities as a measure of operating performance. We calculate FFO in accordance with the standards established by the National Association of Real Estate Investment Trusts (“NAREIT”). FFO represents net income (loss) (computed in accordance with GAAP), adjusted to exclude gains (or losses) from sales of depreciable real estate related to our primary business, impairment write-downs of depreciable real estate related to our primary business, real estate-related depreciation and amortization, and similar adjustments for unconsolidated entities. To the extent we incur gains or losses from the sale of assets that are incidental to our primary business, or incur impairment write-downs associated with assets that are incidental to our primary business, we include such amounts in our calculation of FFO. Our management uses FFO as a supplemental operating performance measure because, in excluding real estate-related depreciation and amortization, impairment write-downs of depreciable real estate and gains and losses from property dispositions related to our primary business, it provides a performance measure that, when compared year over year, captures trends in occupancy rates, rental rates and operating costs.

Due to the volatility and nature of certain significant charges and gains recorded in our operating results that management believes are not reflective of our operating performance, management computes an adjusted measure of FFO, which we refer to as Operating funds from operations (“Operating FFO”). Operating FFO is a non-GAAP measure that is used as a supplemental operating measure and to provide additional information to users of the financial statements. We generally calculate Operating FFO as FFO excluding certain non-routine charges and gains and losses that management believes are not indicative of the results of our operating real estate portfolio. We believe that Operating FFO provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent they calculate Operating FFO on a comparable basis, between REITs.

Adjusted Operating Funds From Operations (“Adjusted Operating FFO”) is a non-GAAP measure that is used as a supplemental operating measure and to provide additional information to users of the financial statements. We calculate Adjusted Operating FFO by adding or subtracting from Operating FFO items such as: maintenance capital investment, paid leasing commissions, amortization of deferred financing costs, non-real estate depreciation and amortization, straight-line rent adjustments, income taxes, equity-based compensation and similar adjustments for unconsolidated entities.

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We offer these measures because we recognize that FFO, Operating FFO and Adjusted Operating FFO will be used by investors as a basis to compare our operating performance with that of other REITs. However, because FFO, Operating FFO and Adjusted Operating FFO exclude real estate depreciation and amortization and capture neither the changes in the value of our properties that result from use or market conditions, nor the level of capital expenditures and capitalized leasing commissions necessary to maintain the operating performance of our properties, all of which have real economic effect and could materially impact our financial condition, cash flows and results of operations, the utility of FFO, Operating FFO and Adjusted Operating FFO as measures of our operating performance is limited. Our calculation of FFO may not be comparable to measures calculated by other companies who do not use the NAREIT definition of FFO or do not calculate FFO in accordance with NAREIT guidance. In addition, our calculations of FFO, Operating FFO and Adjusted Operating FFO are not necessarily comparable to similarly titled measures as calculated by other REITs that do not use the same definition or implementation guidelines or interpret the standards differently from us. FFO, Operating FFO and Adjusted Operating FFO are non-GAAP measures and should not be considered a measure of our results of operations or liquidity or as a substitute for, or an alternative to, net income (loss), cash provided by operating activities or any other performance measure determined in accordance with GAAP, nor is it indicative of funds available to fund our cash needs, including our ability to make distributions to our stockholders.

A reconciliation of net income to FFO, Operating FFO and Adjusted Operating FFO is presented below (unaudited and in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
FFO
Net income	$	4,199	$	10,209	12,117		$	18,329
Equity in net loss of unconsolidated entity	705		590		1,264		1,267
Real estate depreciation and amortization	55,044		44,196		107,673		85,896
Pro rata share of FFO from unconsolidated entity	474		399		931		677
FFO (1)	60,422		55,394		121,985		106,169
Preferred stock dividends	(7,045)		(7,045)		(14,090)		(14,090)
FFO available to common stockholders & OP unit holders	53,377		48,349		107,895		92,079

Transaction and integration costs	8,391		381		9,907		597
Operating FFO available to common stockholders & OP unit holders (2)	61,768		48,730		117,802		92,676

Maintenance capital expenditures	(2,337)		(4,220)		(4,041)		(5,882)
Leasing commissions paid	(11,491)		(6,805)		(20,951)		(15,803)
Amortization of deferred financing costs	1,129		991		2,259		1,978
Non real estate depreciation and amortization	3,212		3,358		6,088		6,728
Straight-line rent revenue and expense and other	(7,916)		(5,702)		(15,525)		(9,457)
Tax expense (benefit) from operating results	251		138		389		(31)
Equity-based compensation expense	7,311		6,082		14,167		10,957
Adjustments for unconsolidated entity	51		(88)		97		(22)
Adjusted Operating FFO available to common stockholders & OP unit holders (2)	$	51,978	$	42,484	$	100,285	$	81,144

_______________________

(1)No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three and six months ended June 30, 2021 and 2020.

(2)Our calculations of Operating FFO and Adjusted Operating FFO may not be comparable to Operating FFO and Adjusted Operating FFO as calculated by other REITs that do not use the same definition.

Monthly Recurring Revenue (MRR) and Recognized MRR

We calculate MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR is also calculated to include our pro rata share of monthly contractual revenue under signed leases as of a particular date associated with unconsolidated entities, which includes revenue from the unconsolidated entity’s rental and managed services activities, but excludes the unconsolidated entity’s customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR reflects the annualized cash rental payments. It does not include the impact from backlog leases as of a particular date, unless otherwise specifically noted.

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Separately, we calculate recognized MRR as the recurring revenue recognized during a given period, which includes revenue from our rental and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues.

Management uses MRR and recognized MRR as supplemental performance measures because they provide useful measures of increases in contractual revenue from our customer leases and customer leases attributable to our business. MRR and recognized MRR should not be viewed by investors as alternatives to actual monthly revenue, as determined in accordance with GAAP. Other companies may not calculate MRR or recognized MRR in the same manner. Accordingly, our MRR and recognized MRR may not be comparable to other companies’ MRR and recognized MRR. MRR and recognized MRR should be considered only as supplements to total revenues as a measure of our performance. MRR and recognized MRR should not be used as measures of our results of operations or liquidity, nor is it indicative of funds available to meet our cash needs, including our ability to make distributions to our stockholders.

A reconciliation of total GAAP revenues to recognized MRR in the period and MRR at period end is presented below (unaudited and in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Recognized MRR in the period
Total period revenues (GAAP basis)	$	155,220	$	131,640	$	303,952	$	257,932
Less: Total period variable lease revenue from recoveries	(17,692)		(12,528)		(33,820)		(24,803)
Total period deferred setup fees	(7,241)		(4,520)		(13,677)		(8,444)
Total period straight-line rent and other	(10,456)		(9,327)		(22,079)		(17,359)
Recognized MRR in the period	$	119,831	$	105,265	$	234,376	$	207,326

MRR at period end
Total period revenues (GAAP basis)	$	155,220	$	131,640	$	303,952	$	257,932
Less: Total revenues excluding last month	(102,328)		(87,538)		(251,060)		(213,830)
Total revenues for last month of period	52,892		44,102		52,892		44,102
Less: Last month variable lease revenue from recoveries	(6,358)		(4,350)		(6,358)		(4,350)
Last month deferred setup fees	(2,548)		(1,533)		(2,548)		(1,533)
Last month straight-line rent and other	(2,794)		(2,480)		(2,794)		(2,480)
Add: Pro rata share of MRR at period end of unconsolidated entity	465		352		465		352
MRR at period end (1)	$	41,657	$	36,091	$	41,657	$	36,091

_______________________

(1)Does not include our backlog of cash rent balance, which was $7.5 million and $9.3 million as of June 30, 2021 and 2020, respectively.

Net Operating Income (NOI)

We calculate net operating income (“NOI”) as net income (loss) (computed in accordance with GAAP), excluding: interest expense, interest income, tax expense (benefit), depreciation and amortization, write off of unamortized deferred financing costs, other (income) expense, debt restructuring costs, transaction, integration and impairment costs, gain (loss) on sale of real estate, restructuring costs, general and administrative expenses and similar adjustments for unconsolidated entities. We allocate a management fee charge of 4% of cash revenues for all facilities as a property operating cost and a corresponding reduction to general and administrative expense to cover the day-to-day administrative costs to operate our data centers. The management fee charge is reflected as a reduction to net operating income.

Management uses NOI as a supplemental performance measure because it provides a useful measure of the operating results from our customer leases. In addition, we believe it is useful to investors in evaluating and comparing the operating performance of our properties and to compute the fair value of our properties. Our NOI may not be comparable to other REITs' NOI as other REITs may not calculate NOI in the same manner. NOI should be considered only as a supplement to net income (loss) as a measure of our performance and should not be used as a measure of our results of operations or liquidity or as an indication of funds available to meet our cash needs, including our ability to make distributions to our stockholders. NOI is a measure of the operating performance of our properties and not of our performance as a whole. NOI is therefore not a substitute for net income (loss) as computed in accordance with GAAP.

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A reconciliation of net income to NOI is presented below (unaudited and in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
Net Operating Income (NOI)
Net income	$	4,199	$	10,209	$	12,117	$	18,329
Equity in net loss of unconsolidated entity	705		590		1,264		1,267
Interest income	(1)		(2)		(1)		(2)
Interest expense	7,452		6,924		15,600		14,086
Depreciation and amortization	58,255		47,554		113,761		92,624
Other (income) expense	—		—		—		(159)
Tax expense (benefit)	251		138		389		(31)
Transaction and integration costs	8,391		381		9,907		597
General and administrative expenses	24,476		21,391		48,117		42,074
NOI from consolidated operations (1)	$	103,728	$	87,185	$	201,154	$	168,785
Pro rata share of NOI from unconsolidated entity	1,115		927		2,248		1,771
Total NOI (1)	$	104,843	$	88,112	$	203,402	$	170,556

_______________________

(1)Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities. These allocated charges aggregated to $5.7 million and $4.8 million for the three months ended June 30, 2021 and 2020, respectively, and $11.2 million and $9.5 million for the six months ended June 30, 2021 and 2020, respectively.

Earnings Before Interest, Taxes, Depreciation and Amortization for Real Estate (EBITDAre) and Adjusted EBITDA

We calculate EBITDAre in accordance with the standards established by NAREIT. EBITDAre represents net income (computed in accordance with GAAP) adjusted to exclude gains (or losses) from sales of depreciated property related to our primary business, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property related to our primary business, and similar adjustments for unconsolidated entities. Management uses EBITDAre as a supplemental performance measure because it provides performance measures that, when compared year over year, captures the performance of our operations by removing the impact of our capital structure (primarily interest expense) and asset base charges (primarily depreciation and amortization) from our operating results.

Due to the volatility and nature of certain significant charges and gains recorded in our operating results that management believes are not reflective of operating performance, we compute an adjusted measure of EBITDAre, which we refer to as Adjusted EBITDA. We calculate Adjusted EBITDA as EBITDAre excluding certain non-routine charges, write off of unamortized deferred financing costs, gains (losses) on extinguishment of debt, restructuring costs, and transaction and integration costs, as well as our pro-rata share of each of those respective adjustments associated with the unconsolidated entity aggregated into one line item categorized as “Adjustments for the unconsolidated entity.” In addition, we calculate Adjusted EBITDA excluding certain non-cash recurring costs such as equity-based compensation. We believe that Adjusted EBITDA provides investors with another financial measure that may facilitate comparisons of operating performance between periods and, to the extent other REITs calculate Adjusted EBITDA on a comparable basis, between REITs.

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

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A reconciliation of net income to EBITDAre and Adjusted EBITDA is presented below (unaudited and in thousands):


	Three Months Ended				Six Months Ended
	June 30,				June 30,
	2021		2020		2021		2020
EBITDAre and Adjusted EBITDA
Net income	$	4,199	$	10,209	$	12,117	$	18,329
Equity in net loss of unconsolidated entity	705		590		1,264		1,267
Interest income	(1)		(2)		(1)		(2)
Interest expense	7,452		6,924		15,600		14,086
Tax expense (benefit)	251		138		389		(31)

QTS Realty Trust, Inc. 10-Q