QTS Realty Trust, Inc. (Form: 10-Q, Received: 05/10/2019 16:32:56)

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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 March 31, 2019

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

For the transition period from to

Commission File Number 001-36109

QTS Realty Trust, Inc.

QualityTech, LP

(Exact name of registrant as specified in its charter)

Maryland (QTS Realty Trust, Inc.)	46-2809094
Delaware (QualityTech, LP) (State or other jurisdiction of incorporation or organization)	27-0707288 (I.R.S. Employer Identification No.)

12851 Foster Street, Overland Park, Kansas	66213
(Address of principal executive offices)	(Zip Code)

(Registrant’s telephone number, including area code) (913) 312-5503

Not Applicable

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

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


QTS Realty Trust, Inc. Yes ☒ No ☐	QualityTech, LP Yes ☒ No ☐

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


QTS Realty Trust, Inc. Yes ☒ No ☐	QualityTech, LP Yes ☒ No ☐

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

QTS Realty Trust, Inc.


Large accelerated filer	☒	Accelerated filer	☐

Non-accelerated filer	☐	Smaller reporting company	☐

		Emerging growth company	☐

QualityTech, LP


Large accelerated filer	☐	Accelerated filer	☐

Non-accelerated filer	☒	Smaller reporting company	☐

		Emerging growth company	☐

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

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


QTS Realty Trust, Inc. Yes ☐ No ☒	QualityTech, LP Yes ☐ No ☒

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, $.01 par value	QTS	New York Stock Exchange
Preferred Stock, 7.125% Series A Cumulative Redeemable Perpetual, $0.01 par value	QTS PR A	New York Stock Exchange
Preferred Stock, 6.50% Series B Cumulative Convertible Perpetual, $0.01 par value	QTS PR B	New York Stock Exchange

There were 55,261,739 shares of Class A common stock, $0.01 par value per share, and 128,408 shares of Class B common stock, $0.01 par value per share, of QTS Realty Trust, Inc. outstanding on May 6, 2019.

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EXPLANATORY NOTE

This report combines the quarterly reports on Form 10-Q of QTS Realty Trust, Inc. (“QTS”) and QualityTech, LP, a Delaware limited partnership, which is our operating partnership (the “Operating Partnership”). This report also includes the financial statements of QTS and those of the Operating Partnership, although it presents only one set of combined notes for QTS’ financial statements and those of the Operating Partnership.

Substantially all of QTS’s assets are held by, and its operations are conducted through, the Operating Partnership. QTS is the sole general partner of the Operating Partnership, and, as of March 31, 2019, its only material asset consisted of its ownership of approximately 89.2% of the Operating Partnership. Management operates QTS and the Operating Partnership as one business. The management of QTS consists of the same employees as the management of the Operating Partnership. QTS does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. QTS has not issued or guaranteed any indebtedness. Except for net proceeds from public equity issuances by QTS, which are contributed to the Operating Partnership in exchange for units of limited partnership interest of the Operating Partnership, the Operating Partnership generates all remaining capital required by our business through its operations, the direct or indirect incurrence of indebtedness, and the issuance of partnership units. Therefore, as general partner with voting control of the Operating Partnership, QTS consolidates the Operating Partnership for financial reporting purposes.

We believe, therefore, that a combined presentation with respect to QTS and the Operating Partnership, including providing one set of notes for the financial statements of QTS and the Operating Partnership, provides the following benefits:

enhances investors’ understanding of QTS and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure in this report applies to both QTS and the Operating Partnership; and

creates time and cost efficiencies through the preparation of one presentation instead of two separate presentations.

In addition, in light of these combined disclosures, we believe it is important for investors to understand the few differences between QTS and the Operating Partnership in the context of how QTS and the Operating Partnership operate as a consolidated company. With respect to balance sheets, the presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated balance sheets of QTS and those of the Operating Partnership. On the Operating Partnership’s consolidated balance sheets, partners’ capital includes preferred partnership units and common partnership units as well as accumulated other comprehensive income (loss) that are owned by or attributable to QTS and other partners. On QTS’ consolidated balance sheets, stockholders’ equity includes preferred stock, common stock, additional paid-in capital, accumulated other comprehensive income (loss) and accumulated dividends in excess of earnings. The remaining equity reflected on QTS’ consolidated balance sheet is the portion of net assets that are retained by partners other than QTS, referred to as noncontrolling interests. With respect to statements of operations, the primary difference in QTS’ Statements of Operations and Statements of Comprehensive Income (Loss) is that for net income (loss), QTS retains its proportionate share of the net income (loss) based on its ownership of the Operating Partnership, with the remaining balance being retained by the Operating Partnership.

In order to highlight the few differences between QTS and the Operating Partnership, there are sections and disclosure in this report that discuss QTS and the Operating Partnership separately, including separate financial statements, separate audit reports, separate controls and procedures sections, separate Exhibit 31 and 32 certifications, and separate presentation of certain accompanying notes to the financial statements, including Note 10 – Partners’ Capital, Equity and Incentive Compensation Plans. In the sections that combine disclosure for QTS and the Operating Partnership, this report refers to actions or holdings as being actions or holdings of “we,” “our,” “us,” “our company” and “the Company.” Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, we believe that these general references to “we,” “our,” “us,” “our company” and “the Company” in this context are appropriate because the business is one enterprise operated through the Operating Partnership.

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QTS Realty Trust, Inc.

QualityTech, LP

Form 10-Q

For the Quarterly Period Ended March 31, 2019

INDEX


		Page
PART I.	FINANCIAL INFORMATION

ITEM 1.	Financial Statements of QTS Realty Trust, Inc.	4

	Financial Statements of Quality Tech, LP	4

	Notes to QTS Realty Trust, Inc. and QualityTech, LP Financial Statements	16

ITEM 2.	Management's Discussion and Analysis of Financial Condition and Results of Operations	46

ITEM 3.	Quantitative and Qualitative Disclosures About Market Risk	68

ITEM 4.	Controls and Procedures	69

PART II.	OTHER INFORMATION

ITEM 1.	Legal Proceedings	70

ITEM 1A.	Risk Factors	70

ITEM 2.	Unregistered Sales of Equity Securities and Use of Proceeds	70

ITEM 3.	Defaults Upon Senior Securities	71

ITEM 4.	Mine Safety Disclosures	71

ITEM 5.	Other Information	71

ITEM 6.	Exhibits	71

	Signatures	74

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PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)


	March 31, 2019		December 31, 2018
	(unaudited)
ASSETS
Real Estate Assets
Land	$	105,541	$	105,541
Buildings, improvements and equipment		2,031,825		1,917,251
Less: Accumulated depreciation		(494,787)		(467,644)
		1,642,579		1,555,148
Construction in progress		803,888		790,064
Real Estate Assets, net		2,446,467		2,345,212
Investments in unconsolidated entity		44,191		—
Operating lease right-of-use assets, net		61,585		—
Cash and cash equivalents		18,678		11,759
Rents and other receivables, net		56,898		55,093
Acquired intangibles, net		92,053		95,451
Deferred costs, net		45,674		45,096
Prepaid expenses		9,585		6,822
Goodwill		173,843		173,843
Assets held for sale		—		71,800
Other assets, net		55,280		56,893
TOTAL ASSETS	$	3,004,254	$	2,861,969

LIABILITIES
Unsecured credit facility, net	$	828,861	$	945,657
Senior notes, net of debt issuance costs		394,944		394,786
Finance leases and mortgage notes payable		48,988		4,674
Operating lease liabilities		69,346		—
Accounts payable and accrued liabilities		120,501		99,166
Dividends and distributions payable		33,244		29,633
Advance rents, security deposits and other liabilities		34,515		32,679
Liabilities held for sale		—		24,349
Deferred income taxes		1,208		1,097
Deferred income		38,167		33,241
TOTAL LIABILITIES	$	1,569,774	$	1,565,282

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 March 31, 2019 and December 31, 2018, respectively		103,212		103,212
6.50% Series B cumulative convertible perpetual preferred stock: $0.01 par value (liquidation preference $100.00 per share), 3,162,500 shares authorized, issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		304,223		304,265
Common stock: $0.01 par value, 450,133,000 shares authorized, 55,353,643 and 51,123,417 shares issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		554		511
Additional paid-in capital		1,214,711		1,062,473
Accumulated other comprehensive income (loss)		(6,702)		2,073
Accumulated dividends in excess of earnings		(292,219)		(278,548)
Total stockholders’ equity		1,323,779		1,193,986
Noncontrolling interests		110,701		102,701
TOTAL EQUITY		1,434,480		1,296,687
TOTAL LIABILITIES AND EQUITY	$	3,004,254	$	2,861,969

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands except share and per share data)


	Three Months Ended March 31,
	2019		2018
Revenues:
Rental	$	98,596	$	88,415
Variable lease revenue from recoveries		10,793		11,513
Other		3,300		13,769
Total revenues		112,689		113,697
Operating expenses:
Property operating costs		34,103		37,740
Real estate taxes and insurance		3,367		2,905
Depreciation and amortization		38,788		35,913
General and administrative		19,891		22,234
Transaction and integration costs		1,214		920
Restructuring		—		8,530
Total operating expenses		97,363		108,242
Gain on sale of real estate, net		13,408		—
Operating income		28,734		5,455
Other income and expense:
Interest income		45		1
Interest expense		(7,146)		(8,110)
Equity in earnings (loss) of unconsolidated entity		(274)		—
Income (loss) before taxes		21,359		(2,654)
Tax benefit (expense) of taxable REIT subsidiaries		(211)		2,402
Net income (loss)		21,148		(252)
Net (income) loss attributable to noncontrolling interests		(1,590)		29
Net income (loss) attributable to QTS Realty Trust, Inc.	$	19,558	$	(223)
Preferred stock dividends		(7,045)		(328)
Net income (loss) attributable to common stockholders	$	12,513	$	(551)

Net income (loss) per share attributable to common shares:
Basic	$	0.20	$	(0.02)
Diluted		0.20		(0.02)

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)


	Three Months Ended March 31,
	2019		2018
Net income (loss)	$	21,148	$	(252)
Other comprehensive income:
Increase (decrease) in fair value of derivative contracts		(9,853)		5,982
Reclassification of other comprehensive income to interest expense (income)		(494)		402
Comprehensive income		10,801		6,132
Comprehensive (income) attributable to noncontrolling interests		(1,217)		(702)
Comprehensive income attributable to QTS Realty Trust, Inc.	$	9,584	$	5,430

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 months ended March 31, 2019:


									Accumulated other		Accumulated		Total
	Preferred Stock			Common stock			Additional		comprehensive		dividends in		stockholders'		Noncontrolling
	Shares	Amount		Shares	Amount		paid-in capital		income (loss)		excess of earnings		equity		interests		Total
Balance January 1, 2019	7,443	$	407,477	51,123	$	511	$	1,062,473	$	2,073	$	(278,548)	$	1,193,986	$	102,701	$	1,296,687
Net cumulative effect upon ASC 842 adoption (see Note 2)	—		—	—		—		—		—		(1,813)		(1,813)		—		(1,813)
Net share activity through equity award plan	—		—	231		3		660		—		—		663		78		741
Decrease in fair value of derivative contracts	—		—	—		—		—		(8,775)		—		(8,775)		(1,078)		(9,853)
Equity-based compensation expense	—		—	—		—		2,928		—		—		2,928		372		3,300
Adjustment to expenses net from Series B Preferred stock offering	—		(42)	—		—		—		—		—		(42)		—		(42)
Net proceeds from common equity offering	—		—	4,000		40		148,650		—		—		148,690		9,973		158,663
Dividends declared on the Series A Preferred Stock	—		—	—		—		—		—		(1,906)		(1,906)		—		(1,906)
Dividends declared on the Series B Preferred Stock	—		—	—		—		—		—		(5,139)		(5,139)		—		(5,139)
Dividends declared to common stockholders	—		—	—		—		—		—		(24,371)		(24,371)		—		(24,371)
Dividends to noncontrolling interests	—		—	—		—		—		—		—		—		(2,935)		(2,935)
Net income	—		—	—		—		—		—		19,558		19,558		1,590		21,148
Balance March 31, 2019	7,443	$	407,435	55,354	$	554	$	1,214,711	$	(6,702)	$	(292,219)	$	1,323,779	$	110,701	$	1,434,480

The consolidated statement of equity for the three months ended March 31, 2018:


									Accumulated other		Accumulated		Total
	Preferred Stock			Common stock			Additional		comprehensive		dividends in		stockholders'		Noncontrolling
	Shares	Amount		Shares	Amount		paid-in capital		income		excess of earnings		equity		interests		Total
Balance January 1, 2018	—	$	—	50,702	$	507	$	1,049,176	$	1,283	$	(173,552)	$	877,414	$	113,242	$	990,656
Net share activity through equity award plan	—		—	434		4		(1,311)		—		—		(1,307)		1,069		(238)
Increase in fair value of derivative contracts	—		—	—		—		—		5,290		—		5,290		692		5,982
Equity-based compensation expense	—		—	—		—		4,337		—		—		4,337		561		4,898
Net proceeds from Series A Preferred Stock offering	4,280		103,184	—		—		—		—		—		103,184		—		103,184
Dividends declared on the Series A Preferred Stock	—		—	—		—		—		—		(328)		(328)		—		(328)
Dividends declared to common stockholders	—		—	—		—		—		—		(20,971)		(20,971)		—		(20,971)
Dividends to noncontrolling interests	—		—	—		—		—		—		—		—		(2,736)		(2,736)
Net income (loss)	—		—	—		—		—		—		(223)		(223)		(29)		(252)
Balance March 31, 2018	4,280	$	103,184	51,136	$	511	$	1,052,202	$	6,573	$	(195,074)	$	967,396	$	112,799	$	1,080,195

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited and in thousands)

For the three months ended March 31, 2019 and 2018


	2019		2018
Cash flow from operating activities:
Net income (loss)	$	21,148	$	(252)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		37,247		34,580
Amortization of above and below market leases		64		139
Amortization of deferred loan costs		978		962
Equity-based compensation expense		3,300		3,481
Bad debt recoveries		—		(863)
Gain on sale of real estate, net		(13,408)		—
Deferred tax expense (benefit)		111		(2,402)
Restructuring costs, net of cash paid		—		8,020
Changes in operating assets and liabilities
Rents and other receivables, net		(1,804)		2,753
Prepaid expenses		(2,762)		(4,165)
Other assets		(419)		(3,339)
Accounts payable and accrued liabilities		(6,866)		9,619
Advance rents, security deposits and other liabilities		1,653		(354)
Deferred income		4,926		3,374
Net cash provided by operating activities		44,168		51,553

Cash flow from investing activities:
Proceeds from sale of property, net		52,722		—
Acquisitions, net of cash acquired		—		(24,626)
Additions to property and equipment		(101,234)		(103,936)
Net cash used in investing activities		(48,512)		(128,562)

Cash flow from financing activities:
Credit facility proceeds		93,000		102,000
Credit facility repayments		(210,000)		(95,000)
Payment of deferred financing costs		(173)		(499)
Payment of preferred stock dividends		(7,045)		—
Payment of common stock dividends		(20,961)		(19,670)
Distribution to noncontrolling interests		(2,735)		(2,552)
Proceeds from exercise of stock options		2,687		—
Payment of tax withholdings related to equity-based awards		(2,062)		(867)
Principal payments on finance lease obligations		(799)		(2,324)
Mortgage principal debt repayments		(9)		(16)
Preferred stock issuance proceeds, net of costs		—		103,615
Common stock issuance proceeds, net of costs		159,360		—
Net cash provided by financing activities		11,263		84,687

Net increase in cash and cash equivalents		6,919		7,678
Cash and cash equivalents, beginning of period		11,759		8,243
Cash and cash equivalents, end of period	$	18,678	$	15,921

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)

For the three months ended March 31, 2019 and 2018


	2019		2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (excluding deferred financing costs and amounts capitalized)	$	9,461	$	4,720
Noncash investing and financing activities:
Accrued capital additions	$	69,963	$	102,489
Net increase (decrease) in other assets/liabilities related to change in fair value of derivative contracts	$	(9,853)	$	5,982
Equity received in unconsolidated entity in exchange for real estate assets	$	25,280	$	—
Increase in assets in exchange for finance lease obligation	$	45,024	$	—
Accrued equity issuance costs	$	918	$	432
Accrued preferred stock dividend	$	5,938	$	328

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED BALANCE SHEETS

(in thousands except share and per share data)


	March 31, 2019		December 31, 2018
	(unaudited)
ASSETS
Real Estate Assets
Land	$	105,541	$	105,541
Buildings, improvements and equipment		2,031,825		1,917,251
Less: Accumulated depreciation		(494,787)		(467,644)
		1,642,579		1,555,148
Construction in progress		803,888		790,064
Real Estate Assets, net		2,446,467		2,345,212
Investments in unconsolidated entity		44,191		—
Operating lease right-of-use assets, net		61,585		—
Cash and cash equivalents		18,678		11,759
Rents and other receivables, net		56,898		55,093
Acquired intangibles, net		92,053		95,451
Deferred costs, net		45,674		45,096
Prepaid expenses		9,585		6,822
Goodwill		173,843		173,843
Assets held for sale		—		71,800
Other assets, net		55,280		56,893
TOTAL ASSETS	$	3,004,254	$	2,861,969

LIABILITIES
Unsecured credit facility, net	$	828,861	$	945,657
Senior notes, net of debt issuance costs		394,944		394,786
Finance leases and mortgage notes payable		48,988		4,674
Operating lease liabilities		69,346		—
Accounts payable and accrued liabilities		120,501		99,166
Dividends and distributions payable		33,244		29,633
Advance rents, security deposits and other liabilities		34,515		32,679
Liabilities held for sale		—		24,349
Deferred income taxes		1,208		1,097
Deferred income		38,167		33,241
TOTAL LIABILITIES	$	1,569,774	$	1,565,282

PARTNERS' CAPITAL
7.125% Series A cumulative redeemable perpetual preferred units: $0.01 par value (liquidation preference $25.00 per unit), 4,600,000 units authorized, 4,280,000 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		103,212		103,212
6.50% Series B cumulative convertible perpetual preferred units: $0.01 par value (liquidation preference $100.00 per unit), 3,162,500 units authorized, issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		304,223		304,265
Common units: $0.01 par value, 450,133,000 units authorized, 62,027,587 and 57,799,035 units issued and outstanding as of March 31, 2019 and December 31, 2018, respectively		1,034,554		886,866
Accumulated other comprehensive income		(7,509)		2,344
TOTAL PARTNERS' CAPITAL		1,434,480		1,296,687
TOTAL LIABILITIES AND PARTNERS' CAPITAL	$	3,004,254	$	2,861,969

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED STATEMENTS OF OPERATIONS

(unaudited and in thousands)


	Three Months Ended March 31,
	2019		2018
Revenues:
Rental	$	98,596	$	88,415
Variable lease revenue from recoveries		10,793		11,513
Other		3,300		13,769
Total revenues		112,689		113,697
Operating Expenses:
Property operating costs		34,103		37,740
Real estate taxes and insurance		3,367		2,905
Depreciation and amortization		38,788		35,913
General and administrative		19,891		22,234
Transaction and integration costs		1,214		920
Restructuring		—		8,530
Total operating expenses		97,363		108,242
Gain on sale of real estate, net		13,408		—
Operating income (loss)		28,734		5,455
Other income and expenses:
Interest income		45		1
Interest expense		(7,146)		(8,110)
Equity in earnings (loss) of unconsolidated entity		(274)		—
Income (loss) before taxes		21,359		(2,654)
Tax benefit (expense) of taxable REIT subsidiaries		(211)		2,402
Net income (loss)	$	21,148	$	(252)
Preferred unit distributions		(7,045)		(328)
Net income (loss) attributable to common unitholders	$	14,103	$	(580)

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(unaudited and in thousands)


	Three Months Ended March 31,
	2019		2018
Net income (loss)	$	21,148	$	(252)
Other comprehensive income:
Increase (decrease) in fair value of derivative contracts		(9,853)		5,982
Reclassification of other comprehensive income to interest expense (income)		(494)		402
Comprehensive income	$	10,801	$	6,132

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED STATEMENT OF PARTNERS’ CAPITAL

(unaudited and in thousands)

The consolidated statement of partners’ capital for the three months ended March 31, 2019:


	Limited Partners' Capital						General Partner's Capital			Accumulated other
	Preferred Units			Common Units			Common Units			comprehensive income (loss)
	Units	Amount		Units	Amount		Units	Amount		Amount		Total
Balance January 1, 2019	7,443	$	407,477	57,799	$	886,866	1	$	—	$	2,344	$	1,296,687
Net cumulative effect upon ASC 842 adoption (see Note 2)	—		—	—		(1,813)	—		—		—		(1,813)
Net share activity through equity award plan	—		—	229		741	—		—		—		741
Decrease in fair value of derivative contracts	—		—	—		—	—		—		(9,853)		(9,853)
Equity-based compensation expense	—		—	—		3,300	—		—		—		3,300
Adjustment to expenses from Series B Preferred equity offering	—		(42)	—		—	—		—		—		(42)
Net proceeds from equity offering	—		—	4,000		158,663	—		—		—		158,663
Dividends declared on Series A Preferred Units	—		—	—		(1,906)	—		—		—		(1,906)
Dividends declared on Series B Convertible Preferred Units	—		—	—		(5,139)	—		—		—		(5,139)
Common dividends declared to QTS Realty Trust, Inc.	—		—	—		(24,371)	—		—		—		(24,371)
Partnership distributions	—		—	—		(2,935)	—		—		—		(2,935)
Net income	—		—	—		21,148	—		—		—		21,148
Balance March 31, 2019	7,443	$	407,435	62,028	$	1,034,554	1	$	—	$	(7,509)	$	1,434,480

The consolidated statement of partners’ capital for the three months ended March 31, 2018:


	Limited Partners' Capital						General Partner's Capital			Accumulated other
	Preferred Units			Common Units			Common Units			comprehensive income
	Units	Amount		Units	Amount		Units	Amount		Amount		Total
Balance January 1, 2018	—	$	—	57,246	$	989,207	1	$	—	$	1,449	$	990,656
Net share activity through equity award plan	—		—	564		(238)	—		—		—		(238)
Increase in fair value of derivative contracts	—		—	—		—	—		—		5,982		5,982
Equity-based compensation expense	—		—	—		4,898	—		—		—		4,898
Net proceeds from Series A Preferred equity offering	4,280		103,184	—		—	—		—		—		103,184
Dividends declared on Series A Preferred Units	—		—	—		(328)	—		—		—		(328)
Common dividends declared to QTS Realty Trust, Inc.	—		—	—		(20,971)	—		—		—		(20,971)
Partnership distributions	—		—	—		(2,736)	—		—		—		(2,736)
Net (loss)	—		—	—		(252)	—		—		—		(252)
Balance March 31, 2018	4,280	$	103,184	57,810	$	969,580	1	$	—	$	7,431	$	1,080,195

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW

(unaudited and in thousands)

For the three months ended March 31, 2019 and 2018


	2019		2018
Cash flow from operating activities:
Net income (loss)	$	21,148	$	(252)
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
Depreciation and amortization		37,247		34,580
Amortization of above and below market leases		64		139
Amortization of deferred loan costs		978		962
Equity-based compensation expense		3,300		3,481
Bad debt recoveries		—		(863)
Gain on sale of real estate, net		(13,408)		—
Deferred tax expense (benefit)		111		(2,402)
Restructuring costs, net of cash paid		—		8,020
Changes in operating assets and liabilities
Rents and other receivables, net		(1,804)		2,753
Prepaid expenses		(2,762)		(4,165)
Other assets		(419)		(3,339)
Accounts payable and accrued liabilities		(6,866)		9,619
Advance rents, security deposits and other liabilities		1,653		(354)
Deferred income		4,926		3,374
Net cash provided by operating activities		44,168		51,553

Cash flow from investing activities:
Proceeds from sale of property		52,722		—
Acquisitions, net of cash acquired		—		(24,626)
Additions to property and equipment		(101,234)		(103,936)
Net cash used in investing activities		(48,512)		(128,562)

Cash flow from financing activities:
Credit facility proceeds		93,000		102,000
Credit facility repayments		(210,000)		(95,000)
Payment of deferred financing costs		(173)		(499)
Payment of preferred unit dividends		(7,045)		—
Payment of dividends to QTS Realty Trust, Inc.		(20,961)		(19,670)
Partnership distributions		(2,735)		(2,552)
Proceeds from exercise of stock options		2,687		—
Payment of tax withholdings related to equity-based awards		(2,062)		(867)
Principal payments on finance lease obligations		(799)		(2,324)
Mortgage principal debt repayments		(9)		(16)
Preferred unit issuance proceeds, net of costs		—		103,615
Common unit issuance proceeds, net of costs		159,360		—
Net cash provided by financing activities		11,263		84,687

Net increase in cash and cash equivalents		6,919		7,678
Cash and cash equivalents, beginning of period		11,759		8,243
Cash and cash equivalents, end of period	$	18,678	$	15,921

See accompanying notes to financial statements.

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QUALITYTECH, LP

INTERIM CONSOLIDATED STATEMENTS OF CASH FLOW (continued)

(unaudited and in thousands)

For the three months ended March 31, 2019 and 2018


	2019		2018
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
Cash paid for interest (excluding deferred financing costs and amounts capitalized)	$	9,461	$	4,720
Noncash investing and financing activities:
Accrued capital additions	$	69,963	$	102,489
Increase in other assets related to change in fair value of interest derivative contracts	$	(9,853)	$	5,982
Equity received in unconsolidated entity in exchange for real estate assets	$	25,280	$	—
Increase in assets in exchange for finance lease obligation	$	45,024	$	—
Accrued equity issuance costs	$	918	$	432
Accrued preferred unit dividend	$	5,938	$	328

See accompanying notes to financial statements.

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QTS REALTY TRUST, INC.

QUALITYTECH, LP

NOTES TO UNAUDITED INTERIM CONSOLIDATED FINANCIAL STATEMENTS

1. Description of Business

QTS Realty Trust, Inc., (“QTS”) through its controlling interest in QualityTech, LP (the “Operating Partnership” and collectively with QTS and their subsidiaries, the “Company”) 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 March 31, 2019, the Company’s portfolio consisted of 24 owned and leased properties with data centers located throughout the United States, Canada, Europe and Asia.

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

The Operating Partnership is a Delaware limited partnership formed on August 5, 2009 and is QTS’ historical predecessor. As of March 31, 2019, QTS owned approximately 89.2% of the interests in the Operating Partnership. Substantially all of QTS’ assets are held by, and QTS’ operations are conducted through, the Operating Partnership. QTS’ interest in the Operating Partnership entitles QTS to share in cash distributions from, and in the profits and losses of, the Operating Partnership in proportion to QTS’ percentage ownership. As the sole general partner of the Operating Partnership, QTS generally has the exclusive power under the partnership agreement of the Operating Partnership to manage and conduct the Operating Partnership’s business and affairs, subject to certain limited approval and voting rights of the limited partners. QTS’ board of directors manages the Company’s business and affairs.

2. Summary of Significant Accounting Policies

Basis of Presentation – The accompanying financial statements have been prepared by management in accordance with accounting principles generally accepted in the United States (“U.S. GAAP”) for interim financial information and in compliance with the rules and regulations of the U.S. Securities and Exchange Commission (“SEC”). These unaudited consolidated financial statements and related notes should be read in conjunction with the audited consolidated financial statements and related notes and management’s discussion and analysis included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2018, filed with the SEC on February 25, 2019. The consolidated balance sheet data included herein as of December 31, 2018 was derived from audited financial statements, but does not include all disclosures required by U.S. GAAP. In the opinion of management, all adjustments (consisting of normal recurring adjustments) considered necessary for a fair presentation have been included.

The accompanying financial statements are presented for both QTS Realty Trust, Inc. and QualityTech, LP. References to “QTS” mean QTS Realty Trust, Inc. and its controlled subsidiaries and references to the “Operating Partnership” mean QualityTech, LP and its controlled subsidiaries.

The Operating Partnership meets the definition and criteria of a variable interest entity (“VIE”) in accordance with ASC 810 Consolidation , and the Company is the primary beneficiary of the VIE. As discussed below, the Company’s only material asset is its ownership interest in the Operating Partnership, and consequently, all of its assets and liabilities represent those assets and liabilities of the Operating Partnership. The Company’s debt is an obligation of the Operating Partnership where the creditors may have recourse, under certain circumstances, against the credit of the Company.

QTS is the sole general partner of the Operating Partnership, and its only material asset consists of its ownership interest in the Operating Partnership. Management operates QTS and the Operating Partnership as one business. The management of QTS consists of the same employees as the management of the Operating Partnership. QTS does not conduct business itself, other than acting as the sole general partner of the Operating Partnership and issuing public equity from time to time. QTS has not issued or guaranteed any indebtedness. Except for net proceeds from public equity issuances by QTS, which are contributed to the Operating Partnership in exchange for units of limited partnership interest of the Operating Partnership, the Operating Partnership generates all remaining capital required by the business through its operations, the direct or indirect incurrence of indebtedness, and the issuance of partnership units. Therefore,

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as general partner with control of the Operating Partnership, QTS consolidates the Operating Partnership for financial reporting purposes.

The Company believes, therefore, that providing one set of notes for the financial statements of QTS and the Operating Partnership provides the following benefits:

enhances investors’ understanding of QTS and the Operating Partnership by enabling investors to view the business as a whole in the same manner as management views and operates the business;

eliminates duplicative disclosure and provides a more streamlined and readable presentation since a substantial portion of the disclosure applies to both QTS and the Operating Partnership; and

creates time and cost efficiencies through the preparation of one set of notes instead of two separate sets of notes.

In addition, in light of these combined notes, the Company believes it is important for investors to understand the few differences between QTS and the Operating Partnership in the context of how QTS and the Operating Partnership operate as a consolidated company. With respect to balance sheets, the presentation of stockholders’ equity and partners’ capital are the main areas of difference between the consolidated balance sheets of QTS and those of the Operating Partnership. On the Operating Partnership’s consolidated balance sheets, partners’ capital includes preferred partnership units and common partnership units as well as accumulated other comprehensive income (loss) that are owned by QTS and other partners. On QTS’ consolidated balance sheets, stockholders’ equity includes preferred stock, common stock, additional paid in capital, accumulated other comprehensive income (loss) and accumulated dividends in excess of earnings. The remaining equity reflected on QTS’ consolidated balance sheet is the portion of net assets that are retained by partners other than QTS, referred to as noncontrolling interests. With respect to statements of operations, the primary difference in QTS' Statements of Operations and Statements of Comprehensive Income (Loss) is that for net income (loss), QTS retains its proportionate share of the net income (loss) based on its ownership of the Operating Partnership, with the remaining balance being retained by the Operating Partnership. These combined notes refer to actions or holdings as being actions or holdings of “the Company.” Although the Operating Partnership is generally the entity that enters into contracts, holds assets and issues debt, management believes that these general references to “the Company” in this context is appropriate because the business is one enterprise operated through the Operating Partnership.

As discussed above, QTS owns no operating assets and has no operations independent of the Operating Partnership and its subsidiaries. Also, the Operating Partnership owns no operating assets and has no operations independent of its subsidiaries. Obligations under the 4.75% Senior Notes due 2025 and the unsecured credit facility, both discussed in Note 7, are fully, unconditionally, and jointly and severally guaranteed by the Operating Partnership’s existing subsidiaries (other than foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS Realty Trust, Inc., the Operating Partnership, QTS Finance Corporation (the co-issuer of the 4.75% Senior Notes due 2025) or any subsidiary guarantor. The indenture governing the 4.75% Senior Notes due 2025 restricts the ability of the Operating Partnership to make distributions to QTS, subject to certain exceptions, including distributions required in order for QTS to maintain its status as a real estate investment trust under the Internal Revenue Code of 1986, as amended (the “Code”).

The interim consolidated financial statements of QTS Realty Trust, Inc. include the accounts of QTS Realty Trust, Inc. and its majority owned subsidiaries. This includes the operating results of the Operating Partnership for all periods presented.

Use of Estimates – The preparation of financial statements in conformity with U.S. GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. Significant items subject to such estimates and assumptions include the useful lives of fixed assets, allowances for doubtful accounts and deferred tax assets and the valuation of derivatives, real estate assets, acquired intangible assets and certain accruals.

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

The Company evaluates its investments in unconsolidated 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 the Company’s consolidation assessment. Investments in real estate entities which the Company has the ability to exercise significant influence, but does not have financial or operating control, are accounted for using the equity method of accounting. Accordingly, the Company’s share of the earnings or losses of these entities is included in consolidated net income (loss).

Variable Interest Entities (VIEs) – The Company determines 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 the Company holds 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. The Company makes judgments regarding the sufficiency of the equity at risk based first on a qualitative analysis, and then a quantitative analysis, if necessary.

The Company analyzes any investments in VIEs to determine if the Company is the primary beneficiary. In evaluating whether it is the primary beneficiary, the Company evaluates its direct and indirect economic interests in the entity. A reporting entity is determined to be the primary beneficiary if it holds a controlling financial interest in the VIE. Determining which reporting entity, if any, has a controlling financial interest in 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.

The Company considers 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, the Company considers the rights of other investors to participate in those decisions, to replace the manager and to sell or liquidate the entity. The Company determines whether it is the primary beneficiary of a VIE at the time the Company becomes involved with a variable interest entity and reconsiders that conclusion continually. As of March 31, 2019, the Company had one unconsolidated entity that was considered a VIE for which the Company is not the primary beneficiary. The Company’s maximum exposure to losses associated with this VIE is limited to its aggregate investment, which was approximately $44 million as of March 31, 2019.

Reclassifications – Revenue categories in the statement of operations for the three months ended March 31, 2018 have been reclassified to conform to 2019 presentation which consists of three categories instead of four categories presented historically. The statement of operations for the three months ended March 31, 2018 incorporates a reclassification of $2.7 million of straight line rent from the “Other” line item into the “Rental” line item, as well as the combination of $13.2 million of what was previously classified as “Cloud and managed services” revenue and $0.6 million of remaining “Other” revenue into a single “Other” line item.

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 March 31, 2019, depreciation expense related to real estate assets and non-real estate assets was $27.4 million and $2.9 million, respectively, for a total of $30.3 million. For the three months ended March 31, 2018, depreciation expense related to real estate assets and non-

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real estate assets was $23.7 million and $3.2 million, respectively, for a total of $26.9 million. The Company capitalizes certain 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 costs) begins when development efforts commence and ends when the asset is ready for its intended use. Capitalization of such costs, excluding interest, aggregated to $4.5 million and $3.5 million for the three months ended March 31, 2019 and 2018, respectively. Interest is capitalized during the period of development by applying the Company’s 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 $5.4 million for the three months ended March 31, 2019 and 2018, respectively.

Acquisitions and Sales – Acquisitions of real estate and other entities are either accounted for as asset acquisitions or business combinations depending on facts and circumstances. When substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction is accounted for as an asset acquisition. In an asset acquisition, the purchase price paid for assets acquired is allocated between identified tangible and intangible assets acquired based on relative fair value. Transaction costs associated with asset acquisitions are capitalized. When substantially all of the fair value of assets acquired is not concentrated in a group of similar identifiable assets, the set of assets will generally be considered a business. When accounting for business combinations purchase accounting is applied to the assets and liabilities related to all real estate investments acquired in accordance with the accounting requirements of ASC 805, Business Combinations , which requires the recording of net assets of acquired businesses at fair value. The fair value of the consideration transferred is assigned to the acquired tangible assets, consisting primarily of land, construction in progress, building and improvements, and identified intangible assets and liabilities, consisting of the value of above-market and below-market leases, value of in-place leases, value of customer relationships, trade names, software intangibles and finance leases. The excess of the fair value of liabilities assumed, common stock issued and cash paid over the fair value of identifiable assets acquired is allocated to goodwill, which is not amortized by the Company. Transaction costs associated with business combinations are expensed as incurred.

In developing estimates of fair value of acquired assets and assumed liabilities, management analyzed 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.

Acquired in-place leases are amortized as amortization expense on a straight-line basis over the remaining life of the underlying leases. This amortization expense is accounted for as real estate amortization expense.

Acquired customer relationships are amortized as amortization expense on a straight-line basis over the expected life of the customer relationship. This amortization expense is accounted for as real estate amortization expense.

Other acquired intangible assets, which includes platform, above or below market leases, and trade name intangibles, are amortized on a straight-line basis over their respective expected lives. Above or below market leases are amortized as a reduction to or increase in rental revenue when the Company is a lessor as well as a reduction to or increase in rent expense over the remaining lease terms in the case of the Company as lessee. The expense associated with trade name intangibles is accounted for as real estate amortization expense, whereas the expense associated with the amortization of platform intangibles is accounted for as non-real estate amortization expense.

The Company accounts for the sale of assets to non-customers under Financial Accounting Standards Board (“FASB”) Accounting Standards Update (“ASU”) No. 2017-05, Other Income—Gains and Losses from the Derecognition of Nonfinancial Assets (Subtopic 610-20), which provides for recognition or derecognition based on transfer of ownership. During the three months ended March 31, 2019, the Company sold its Manassas facility to an unconsolidated affiliate in exchange for cash consideration and noncash consideration in the form of an equity interest in the unconsolidated entity. After measuring the consideration received at fair value, the Company recognized a $13.4 million gain on sale of real estate, net of approximately $5.8 million of transaction costs, associated with the Company’s contribution of certain assets in its Manassas facility to the unconsolidated entity. Substantially all of the fair value of the assets contributed to the entity was concentrated in a group of similar identifiable assets and the sale of the assets were not to a customer,

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therefore the transaction was accounted for as an asset sale. The gain on sale of real estate is included within the “Gain on sale of real estate, net” line item of the consolidated statements of operations.

Impairment of Long-Lived Assets, Intangible Assets and Goodwill – The Company reviews its long-lived assets and intangible assets 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 exceeds the value of the undiscounted cash flows, the fair value of the asset is assessed and may be considered impaired. An impairment loss is recognized based on the excess of the carrying amount of the impaired asset over its fair value. No impairment losses were recorded for the three months ended March 31, 2019. The Company recognized $4.0 million of impairment losses related to certain non-real estate product related assets during the three months ended March 31, 2018, which was included in the “Restructuring” line item of the consolidated statement of operations.

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 the Company performed as of October 1, 2018, the Company determined qualitatively that it is not more likely than not that the fair value of the Company’s one reporting unit was less than the carrying amount, thus it did not perform a quantitative analysis. As the Company continues to operate and assess its goodwill at the consolidated level for its single reporting unit and its market capitalization significantly exceeds its net asset value, further analysis was not deemed necessary as of March 31, 2019.

Assets Held for Sale – The Company completed the sale of the Manassas facility to an unconsolidated entity on February 22, 2019. As of December 31, 2018, prior to the Company’s sale of the assets to the entity, the completion of the sale was probable and the Company accordingly reclassified certain assets, as well as liabilities associated with those assets, as held for sale. As of December 31, 2018, the asset value of $71.8 million associated with the held for sale assets was included within the “Assets held for sale” line item of the consolidated statements of financial position and primarily consisted of construction in progress. As of December 31, 2018, the liability value of $24.3 million associated with the held for sale liabilities was included within the “Liabilities held for sale” line item of the consolidated statements of financial position and primarily consisted of accounts payable and accrued liabilities associated with construction in progress assets. See Note 6 for further discussion of the unconsolidated entity.

Cash and Cash Equivalents – The Company considers 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. The Company’s 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. The Company mitigates this risk by depositing a majority of its funds with several major financial institutions. The Company also has not experienced any losses and does not believe that the risk is significant.

Deferred Costs – Deferred costs, net, on the Company’s balance sheets include both financing costs and leasing costs.

Deferred financing costs represent fees and other costs incurred in connection with obtaining debt and are amortized over the term of the loan and are included in interest expense. Debt issuance costs related to revolving debt arrangements are deferred and presented as assets on the balance sheet; however, all other debt issuance costs are recorded as a direct offset to the associated liability. Amortization of debt issuance costs, including those costs presented as offsets to the associated liability in the consolidated balance sheet, was $1.0 million for both the three months ended March 31, 2019

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and 2018, respectively. Deferred financing costs presented as assets on the balance sheet related to revolving debt arrangements, net of accumulated amortization, are as follows:


	March 31,		December 31,
(dollars in thousands)	2019		2018
	(unaudited)

Deferred financing costs	$	11,488	$	11,530
Accumulated amortization		(4,335)		(3,859)
Deferred financing costs, net	$	7,153	$	7,671

Deferred financing costs presented as offsets to the associated liabilities on the balance sheet related to fixed debt arrangements, net of accumulated amortization, are as follows:


	March 31,		December 31,
(dollars in thousands)	2019		2018
	(unaudited)

Deferred financing costs	$	14,641	$	14,501
Accumulated amortization		(3,446)		(2,944)
Deferred financing costs, net	$	11,195	$	11,557

Initial direct costs, or deferred leasing costs, include commissions paid to third parties, including brokers, leasing and referral agents, and internal sales commissions paid to employees for successful execution of lease agreements and are accounted for pursuant to ASC 842, Leases . These costs are incurred when the Company executes lease agreements and represent only incremental costs that would not have been incurred if the lease agreement had not been executed. To a lesser extent, the Company incurs the same incremental costs to obtain managed service contracts with customers that are accounted for pursuant to ASC 606, Revenue from Contracts with Customers. Because the framework of accounting for these costs and the underlying nature of the costs are the same for the Company’s revenue and lease contracts, the costs are presented on a combined basis within the Company’s financial statements and within the below table. Both revenue and leasing commissions are capitalized and generally amortized over the term of the related leases or the expected term of the contract using the straight-line method. If a customer lease terminates prior to the expiration of its initial term, any unamortized initial direct costs related to the lease are written off to amortization expense. Amortization of deferred leasing costs totaled $5.4 million and $4.9 million for the three months ended March 31, 2019 and 2018, respectively. Deferred leasing costs, net of accumulated amortization, are as follows:


	March 31,		December 31,
(dollars in thousands)	2019		2018
	(unaudited)

Deferred leasing costs	$	65,655	$	63,018
Accumulated amortization		(27,134)		(25,593)
Deferred leasing costs, net	$	38,521	$	37,425

Revenue Recognition – The Company derives its revenues from leases with customers for data center space which include lease components and nonlease revenue components, such as power, tenant recoveries, cloud and managed services. The Company adopted Accounting Standards Codification (“ASC”) Topic 842, Leases , the new accounting standard for leases, effective January 1, 2019 using the modified retrospective approach. In addition, the Company adopted ASC Topic 606, Revenue from Contracts with Customers , the new accounting standard for revenue from contracts with customers, effective January 1, 2018 using the modified retrospective approach. The Company has elected the available practical expedient to combine its nonlease revenue components that have the same pattern of transfer as the related operating lease component into a single combined lease component under ASC 842. See the “Recently Adopted Accounting Standards” section below for further details.

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A description of each of the Company’s disaggregated revenue streams as presented on the face of the Consolidated Statements of Operations is as follows:

Rental Revenue

The Company’s 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. The Company does 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 the Company to provide a series of distinct services of standing ready to deliver the power over the contracted term which is co-terminus with the lease. Customer fixed power arrangements have the same pattern of transfer over the lease term as the lease component and are therefore combined with the lease component to form a single lease component that is recognized over the term of the lease on a straight line basis.

In addition, rental revenue includes straight line rent. Straight line rent represents the difference in rents recognized during the period versus amounts contractually due pursuant to the underlying leases and is recorded as deferred rent receivable/payable in the consolidated balance sheets. For lease agreements that provide for scheduled rent increases, rental income is recognized on a straight-line basis over the non-cancellable term of the leases, which commences when control of the space has been provided to the customer. The amount of the straight-line rent receivable on the balance sheets included in rents and other receivables, net was $31.4 million and $29.7 million as of March 31, 2019 and December 31, 2018, respectively.

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

Variable Lease Revenue from Recoveries

Certain customer leases contain provisions under which customers reimburse the Company 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 the Company’s variable power arrangements, whereby customers pay variable monthly fees for the specific amount of power utilized at the current utility rates. The Company’s 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. the Company provides power to its 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.

Other Revenue

Other revenue primarily consists of revenue from the Company’s cloud and managed service offerings. The Company, through its TRS, may provide both its cloud product and use of its managed services to its customers on an individual or combined basis. In both its cloud and managed services offerings the TRS’s performance obligation is to provide services (e.g. cloud hosting, data backup, data storage or data center personnel labor hours) to facilitate a fully integrated information technology (“IT”) outsourcing environment over a contracted term. Although underlying services may vary, over the contracted term monthly service offerings are substantially the same and the Company accounts for the services as a series of distinct services in accordance with ASC 606. Service fee revenue is recognized as the revenue is earned, which generally coincides with the services being provided. As the Company has the right to consideration from

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customers in an amount that corresponds directly with the value to the customer of the TRS’s performance of providing continuous services, the Company recognizes monthly revenue for the amount invoiced.

With respect to the transaction price allocated to remaining performance obligations within the Company’s cloud and managed service contracts, the Company has elected to use the optional exemption provided by ASC 606 whereby the Company is not required to estimate the total transaction price allocated to remaining performance obligations as the Company applies 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 the Company’s unconsolidated affiliate properties as well as third parties. Management fee revenue is earned based on a contractual percentage of unconsolidated affiliate property revenue. Development fee revenue is earned on a contractual percentage of hard costs to develop a property. The Company recognizes revenue for these services provided when earned based on the performance criteria in ASC 606, with such revenue recorded in “Other” revenue on the consolidated statement of operations.

The Company records a provision for uncollectible accounts if a receivable balance relating to contractual rent, rental revenue recorded on a straight-line basis, tenant recoveries or other billed amounts is considered by management to be uncollectible. The provision is based on management’s historical experience and a review of the current status of the Company’s receivables. The aggregate allowance for doubtful accounts on the consolidated balance sheet was $3.3 million and $3.8 million as of March 31, 2019 and December 31, 2018, respectively.

Advance Rents and Security Deposits – Advance rents, typically prepayment of the following month’s rent, consist of payments received from customers prior to the time they are earned and are recognized as revenue in subsequent periods when earned. Security deposits are collected from customers at the lease origination and are generally refunded to customers upon lease expiration.

Deferred Income – Deferred income generally results from non-refundable charges paid by the customer at lease inception to prepare their space for occupancy. The Company records 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 $38.2 million and $33.2 million as of March 31, 2019 and December 31, 2018, respectively. Additionally, $3.2 million and $2.9 million of deferred income was amortized into revenue for the three months ended March 31, 2019 and 2018, 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. The Company has elected to account for forfeitures as they occur. Equity-based compensation expense net of forfeited and repurchased awards was $3.3 million and $3.5 million for the three months ended March 31, 2019 and 2018, respectively. Equity based compensation expense for the three months ended March 31, 2018 excludes $1.4 million of equity based compensation expense associated with the acceleration of equity awards related to certain employees impacted by the Company’s strategic growth plan. The aforementioned equity based compensation expense is included in the “Restructuring” expense line item on the consolidated statements of operations.

Segment Information – The Company manages its business as one operating segment and thus one reportable segment consisting of a portfolio of investments in data centers located primarily in the United States.

Customer Concentrations – As of March 31, 2019, one of the Company’s customers represented 12.5% of its total monthly rental revenue. No other customers exceeded 6% of total monthly rental revenue.

As of March 31, 2019, three of the Company’s customers exceeded 5% of trade accounts receivable. In aggregate, these three customers accounted for approximately 24% of trade accounts receivable. One of these customers individually exceeded 10% of trade accounts receivable.

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Income Taxes – The Company has elected for two of its existing subsidiaries to be taxed as taxable REIT subsidiaries pursuant to the REIT rules of the U.S. Internal Revenue Code.

For the taxable REIT subsidiaries, income taxes are accounted for under the asset and liability method. Deferred tax assets and liabilities are recognized for the future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. Valuation allowances are established when necessary to reduce deferred tax assets to the amount expected to be realized.

A current and deferred tax expense has been recognized in the three months ended March 31, 2019, in connection with recorded operating activity. As of March 31, 2019, one of the Company’s taxable REIT subsidiaries is in a net deferred tax liability position primarily due to a valuation allowance against certain deferred tax assets. In considering whether it is more likely than not that some portion or all of the deferred tax assets will be realized, it has been determined that it is possible that some or all of our deferred tax assets could ultimately expire unused. The Company establishes valuation allowances against deferred tax assets when the ability to fully utilize these benefits is determined to be uncertain.

The Company provides a valuation allowance against deferred tax assets if, based on management’s assessment of operating results and other available evidence, it is more likely than not that some or all of the deferred tax assets will not be realized. The evidence contemplated by management at March 31, 2019 consists of current and prior operating results, available tax planning strategies, and the scheduled reversal of existing taxable temporary differences. Evidence from the scheduled reversal of taxable temporary differences relies on management judgements based on the accumulation of available evidence. Those judgements may be subject to change in the future as evidence available to management changes. Management’s assessment of the Company’s valuation allowance may further change based on our generation of or ability to project future operating income, and changes in tax policy or tax planning strategies.

The Company provides for income taxes during interim periods based on the estimated effective tax rate for the year. The effective tax rate is subject to change in the future due to various factors such as the operating performance of the taxable REIT subsidiaries, tax law changes, and future business acquisitions or divestitures. The taxable REIT subsidiaries’ effective tax rates were (6.3%) and 23.1% for the three months ended March 31, 2019 and 2018, 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 the Company has 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. The Company’s 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.

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As of March 31, 2019, the Company valued its derivative instruments primarily utilizing Level 2 inputs. See Note 15 – ‘Fair Value of Financial Instruments’ for additional details.

Recently Adopted Accounting Standards

Revenue from Contracts with Customers

In May 2014, the Financial Accounting Standards Board (“FASB”) issued guidance codified in ASC Topic 606, Revenue from Contracts with Customers , which supersedes the former revenue recognition requirements in ASC Topic 605, Revenue Recognition . Under this new guidance, entities should recognize revenues to depict the transfer of promised goods or services to customers in an amount that reflects the consideration the entity expects to receive in exchange for those goods or services. The standard establishes a five-step model framework which recognizes revenue as an entity transfers control of goods or services to the customer and requires enhanced disclosures. The Company adopted ASC Topic 606 effective January 1, 2018, and elected the modified retrospective transition approach. The adoption did not result in a cumulative catch-up adjustment to opening equity and does not change the recognition pattern of the Company’s operating revenues.

Leases

In February 2016, and further amended in 2018, the FASB issued ASC Topic 842, Leases , which supersedes the former lease guidance in ASC 840, Lease s. The new standard increases transparency and comparability most significantly by requiring the recognition by lessees of right-of-use (“ROU”) assets and lease liabilities on the balance sheet for those leases classified as operating leases. Under the standard, disclosures are required to meet the objective of enabling users of financial statements to assess the amount, timing, and uncertainty of cash flows arising from leases.

The Company adopted ASC 842 effective January 1, 2019 using the modified retrospective approach, which applied the provisions of the new guidance at the effective date without adjusting comparative periods presented. The Company elected a package of practical expedients permitted under the transition guidance within the new standard which allowed the Company to not reassess (i) whether expired or existing contracts contain a lease under the new standard, (ii) the lease classification for existing leases or (iii) whether previously-capitalized initial direct costs would qualify for capitalization under the new standard. The Company did not elect the hindsight practical expedient which permits entities to use hindsight in determining the lease term and assessing impairment.

The adoption of ASC 842 impacted our consolidated balance sheet with the recognition of existing operating leases as lessee resulting in $62.9 million of ROU assets and $70.7 million of lease liabilities recorded as of January 1, 2019. The Company also recognized a $1.8 million cumulative effect adjustment to retained earnings. The adjustment to retained earnings was due to an impairment of certain ROU assets associated with vacant office space the Company is party to related to a prior acquisition. See the table below for the impact of adoption of the lease standard on our consolidated balance sheet as of January 1, 2019 (in thousands):


	As Previously		New Lease Standard
	Reported		Adjustment		As Adjusted
Operating lease right-of-use assets	$	—	$	62,922	$	62,922
Operating lease liabilities		—		70,657		70,657
Deferred rent payable		5,922		(5,922)		—

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As lessor, accounting for our leases will remain largely unchanged from ASC 840. The new lease standard more narrowly defines initial direct costs as only costs that are incremental to origination of a lease (i.e. costs that would not have been incurred had the lease not been obtained). The Company did not historically capitalize non-incremental costs, therefore this change will have no impact on the accounting for initial direct costs in the consolidated financial statements on a prospective basis.

Additionally, from a lessor perspective, the Company elected a practical expedient which allows lessors to combine nonlease components with the related lease components if both the timing and pattern of transfer are the same for the nonlease component(s) and related lease component, and the lease component would be classified as an operating lease. The single combined component is accounted for under ASC 842 if the lease component is the predominant component and is accounted for under ASC 606 if the nonlease components are the predominant components. Lessors are permitted to apply the practical expedient to all existing leases on a retrospective or prospective basis. The Company elected the practical expedient to combine its lease and nonlease components that meet the defined criteria and will account for the combined lease component under ASC 842 on a prospective basis.

New Accounting Pronouncements

In August 2018, the FASB issued ASU 2018-13, Fair Value Measurement (Topic 820): Disclosure Framework – Changes to the Disclosure Requirements for Fair Value Measurement. The amendments in ASU 2018-13 eliminate the requirements to disclose the amount and reasons for transfers between Level 1 and Level 2 of the fair value hierarchy, valuation processes for Level 3 fair value measurements, and policy for timing of transfers between levels. ASU 2018-13 also provides clarification in the measurement uncertainty disclosure by explaining that the disclosure is to communicate information about the uncertainty in measurement as of the reporting date. In addition, ASU 2018-13 added the following requirements: changes in unrealized gains and losses for the period included in other comprehensive income for recurring Level 3 fair value measurements held at the end of the reporting period; and range and weighted average of significant unobservable inputs used in Level 3 fair value measurements. Finally, ASU 2018-13 updated language to further encourage entities to apply materiality when considering de minimus for disclosure requirements. The guidance will be applied retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with the exception of amendments to changes in unrealized gains and losses, the range and weighted average of significant unobservable inputs used for Level 3 fair value measurements, and the narrative description of measurement uncertainty which will be applied prospectively. Early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

In August 2018, the FASB issued ASU 2018-15, Intangibles – Goodwill and Other – Internal-Use Software ( Subtopic 350-40): Customer’s Accounting for Implementation Costs Incurred in a Cloud Computing Arrangement that is a Service Contract. The amendments in ASU 2018-15 require an entity in a service contract hosting arrangement apply Subtopic 350-40 to identify costs to capitalize or expense related to the service contract. ASU 2018-15 also requires the entity to capitalize the implementation costs of the service contract hosting arrangement and amortize such costs over the life of the contract and present the capitalized costs in the same line item as fees associated with the hosting service on the statement of income and statement of cash flows. The guidance will be applied retrospectively for fiscal years beginning after December 15, 2019, and interim periods within those fiscal years, with the exception of all implementation costs incurred after the date of adoption which will be applied prospectively. Early adoption is permitted. The Company is currently assessing the impact of this standard on its consolidated financial statements.

The Company has determined that all other recently issued accounting pronouncements will not have a material impact on its consolidated financial statements or do not materially apply to its operations.

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3. Acquired Intangible Assets and Liabilities

Summarized below are the carrying values for the major classes of intangible assets and liabilities (unaudited and in thousands):


		March 31, 2019						December 31, 2018
		Gross						Gross
		Carrying		Accumulated		Net Carrying		Carrying		Accumulated		Net Carrying
	Useful Lives	Value		Amortization		Value		Value		Amortization		Value
Customer Relationships	1 to 12 years	$	95,705	$	(30,449)	$	65,256	$	95,705	$	(28,461)	$	67,244
In-Place Leases	0.5 to 10 years		32,066		(18,701)		13,365		32,066		(17,670)		14,396
Solar Power Agreement (1)	17 years		13,747		(3,841)		9,906		13,747		(3,639)		10,108
Platform Intangible	3 years		—		—		—		9,600		(9,600)		—
Acquired Favorable Leases
Acquired below market leases - as Lessee	46 years		2,301		(8)		2,293		2,301		—		2,301
Acquired above market leases - as Lessor	0.5 to 8 years		4,649		(3,416)		1,233		4,649		(3,247)		1,402
Tradenames	3 years		—		—		—		3,100		(3,100)		—
Total Intangible Assets		$	148,468	$	(56,415)	$	92,053	$	161,168	$	(65,717)	$	95,451

Solar Power Agreement (1)	17 years		13,747		(3,841)		9,906		13,747		(3,639)		10,108
Acquired Unfavorable Leases
Acquired below market leases - as Lessor	3 to 4 years		809		(671)		138		809		(611)		198
Acquired above market leases - as Lessee	11 to 12 years		2,453		(821)		1,632		2,453		(767)		1,686
Total Intangible Liabilities (2)		$	17,009	$	(5,333)	$	11,676	$	17,009	$	(5,017)	$	11,992

(1)

Amortization related to the Solar Power Agreement asset and liability is recorded at the same rate and therefore has no net impact on the statement of operations.

(2)

Intangible liabilities are included within the “Advance rents, security deposits and other liabilities” line item of the consolidated balance sheets.

Above or below market leases are amortized as a reduction to or increase in rental revenue in the case of the Company as lessor as well as a reduction to or increase in rent expense in the case of the Company as lessee over the remaining lease terms. The net effect of amortization of acquired above‑market and below‑market leases resulted in a net decrease in rental revenue of $0.1 million and $0.1 million for the three months ended March 31, 2019 and 2018, respectively. The estimated amortization of acquired favorable and unfavorable leases for each of the five succeeding fiscal years ending December 31 is as follows (unaudited and in thousands):


	Net Rental Revenue		Net Rental Expense
	Decrease		Increase/(Decrease)
2019 (April - December)	$	368	$	(121)
2020		647		(166)
2021		46		(166)
2022		17		(166)
2023		17		(166)
Thereafter		—		1,446
Total	$	1,095	$	661

Net amortization of all other identified intangible assets and liabilities was $3.1 million and $4.0 million for the three months ended March 31, 2019 and 2018, respectively. The estimated net amortization of all other identified intangible assets and liabilities for each of the five succeeding fiscal years ending December 31 is as follows (unaudited and in thousands):


2019 (April - December)	$	8,946
2020		11,379
2021		10,137
2022		9,910
2023		9,910
Thereafter		28,339
Total	$	78,621

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4. Real Estate Assets and Construction in Progress

The following is a summary of properties owned or leased by the Company as of March 31, 2019 and December 31, 2018 (in thousands):

As of March 31, 2019 (unaudited):


			Buildings,
			Improvements		Construction
Property Location	Land		and Equipment		in Progress		Total Cost
Atlanta, Georgia (Atlanta-Metro)	$	20,416	$	497,111	$	110,769	$	628,296
Irving, Texas		8,606		346,276		104,988		459,870
Richmond, Virginia		2,180		253,593		68,059		323,832
Chicago, Illinois		9,400		152,704		120,999		283,103
Suwanee, Georgia (Atlanta-Suwanee)		3,521		167,173		2,977		173,671
Ashburn, Virginia (1)		17,326		95,585		166,484		279,395
Piscataway, New Jersey		7,466		98,501		34,141		140,108
Santa Clara, California (2)		—		105,386		1,250		106,636
Dulles, Virginia		3,154		72,756		4,018		79,928
Sacramento, California		1,481		64,904		91		66,476
Leased Facilities (3)		—		89,331		9,449		98,780
Fort Worth, Texas		9,078		18,619		50,869		78,566
Princeton, New Jersey		20,700		34,083		424		55,207
Phoenix, Arizona (1)		—		—		30,016		30,016
Hillsboro, Oregon (1)		—		—		44,942		44,942
Manassas, Virginia (1)		—		8		54,245		54,253
Other (4)		2,213		35,795		167		38,175
	$	105,541	$	2,031,825	$	803,888	$	2,941,254

(1)

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

(2)

Owned facility subject to long-term ground sublease.

(3)

Includes 9 facilities. All facilities are leased, including those subject to finance leases.

(4)

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

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As of December 31, 2018:


			Buildings,
			Improvements		Construction
Property Location	Land		and Equipment		in Progress		Total Cost
Atlanta, Georgia (Atlanta-Metro)	$	20,416	$	493,446	$	88,253	$	602,115
Irving, Texas		8,606		345,615		99,445		453,666
Richmond, Virginia		2,180		253,098		67,932		323,210
Chicago, Illinois		9,400		130,150		133,095		272,645
Ashburn, Virginia (1)		17,325		63,245		184,951		265,521
Suwanee, Georgia (Atlanta-Suwanee)		3,521		166,298		3,188		173,007
Piscataway, New Jersey		7,466		97,806		33,472		138,744
Manassas, Virginia (1) (2)		—		—		45,194		45,194
Santa Clara, California (3)		—		98,548		7,600		106,148
Dulles, Virginia		3,154		72,435		3,852		79,441
Fort Worth, Texas		9,079		18,623		43,715		71,417
Sacramento, California		1,481		64,874		92		66,447
Princeton, New Jersey		20,700		34,046		431		55,177
Leased Facilities (4)		—		43,347		9,334		52,681
Hillsboro, Oregon (1)		—		—		39,835		39,835
Phoenix, Arizona (1)		—		—		29,562		29,562
Other (5)		2,213		35,720		113		38,046
	$	105,541	$	1,917,251	$	790,064	$	2,812,856

(1)

(2)

Excludes $71.0 million of construction in progress included within the “Assets held for sale” line item of the consolidated balance sheets.

(3)

Owned facility subject to long-term ground sublease.

(4)

Includes 10 facilities. All facilities are leased, including those subject to finance leases.

(5)

Consists of Miami, FL; Lenexa, KS; Overland Park, KS; and Duluth, GA facilities.

5. Leases

Leases as Lessee

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

ROU assets represent the Company’s right to use an underlying asset for the lease term and lease liabilities represent the Company’s obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the commencement date based on the present value of lease payments over the lease term. Variable lease payments consist of nonlease services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. As the Company’s leases as lessee typically do not provide an implicit rate, the Company uses its incremental borrowing rate based on the information available at the commencement date in determining the present value of lease payments. The Company assessed 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 the Company’s lease agreements include options to extend the lease, which the Company does not include in its 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.

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The Company uses leasing as a source of financing for certain data center facilities and related equipment. The Company currently operates 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 one to nineteen years. The Company’s finance lease associated with the data center includes multiple extension option periods, some of which were included in the lease term as the Company is reasonably certain to exercise those extension options. The Company’s other finance leases typically do not have options to extend the initial lease term. Finance lease assets are included within the “Buildings, improvements and equipment” line item of the consolidated balance sheets and finance lease liabilities are included within “Finance leases and mortgage notes payable” line item of the consolidated balance sheets.

The Company currently leases seven other facilities under operating lease agreements for various data centers and office space. The Company’s leases have remaining lease terms ranging from one to eight years. The Company has options to extend the initial lease term on nearly all of these leases. Additionally, the Company has two ground leases that are considered operating leases, only one of which is material that is scheduled to expire in 2052.

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


	Three months ended
	March 31, 2019
Operating lease cost	$	3,543
Finance lease cost:
Amortization of assets		386
Interest on lease liabilities		245
Sublease income		(46)
Total lease costs	$	4,128

Supplemental balance sheet information related to leases was as follows (unaudited and in thousands, except lease term and discount rate):


	March 31,
	2019
Operating leases:
Operating lease right-of-use assets	$	61,585
Operating lease liabilities		69,346
Finance leases:
Property and equipment, at cost		48,233
Accumulated amortization		(1,477)
Property and equipment, net	$	46,756
Finance lease liabilities	$	47,196

Weighted average remaining lease term (in years):
Operating leases		14.0
Finance leases		12.1

Weighted average discount rate:
Operating leases		5.1%
Finance leases		4.6%

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Supplemental cash flow and other information related to leases was as follows (unaudited and in thousands):


	Three months ended
	March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
Operating cash flows from operating leases	$	2,523
Operating cash flows from finance leases	$	196
Financing cash flows from finance leases	$	799

Maturities of lease liabilities were as follows (unaudited and in thousands):


	March 31, 2019
	Operating Leases		Finance Leases
2019 (April - December)	$	7,281	$	3,561
2020		9,605		4,493
2021		9,834		4,514
2022		10,283		4,639
2023		10,409		4,776
Thereafter		57,889		39,908
Total Lease Payments	$	105,301	$	61,891
Less: Imputed Interest		35,955		14,695
Total Lease Obligations	$	69,346	$	47,196

Leases as lessor

The Company’s lease revenue contains both minimum lease payments as well as variable lease payments. See Note 2 for further details of the Company’s disaggregated revenue streams and associated accounting treatment. The components of the Company’s lease revenue were as follows (in thousands):


	Three months ended
	March 31,
	2019		2018
Lease revenue:
Minimum lease revenue	$	98,596	$	88,415
Variable lease revenue (recoveries from customers)		10,793		11,513
Total lease revenue	$	109,389	$	99,928

6. Investments in Unconsolidated Entity

During the three months ended March 31, 2019, QTS formed an unconsolidated entity with Alinda Capital Partners (“Alinda”), a premier infrastructure investment firm. QTS contributed a 118,000 square foot hyperscale data center under development in Manassas, Virginia to the entity. The facility, and the previously executed 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 Topic 820. The equity interest received and any amounts due from the unconsolidated entity are recorded within the Company’s consolidated balance sheet and totaled $44.2 million as of March 31, 2019. QTS and Alinda each own a 50% interest in the entity. As the Company is not the primary beneficiary of the arrangement but has the ability to exercise significant influence, the Company concluded that the investment should be accounted for as an unconsolidated entity using equity

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method investment accounting. As of March 31, 2019 the total assets of the entity were $130.7 million and the total debt outstanding was $52.4 million.

Under the equity method, the Company’s cost of investment is adjusted for additional contributions to and distributions from the unconsolidated entity, as well as its share of equity in the earnings and losses of the unconsolidated entity. Generally, distributions of cash flows from operations and capital events are made to members of the unconsolidated entity in accordance with each member’s ownership percentages and the terms of the agreement, but also provides the Company with rights to preferential cash distributions as certain phases are completed and leased to the underlying tenant. Any differences between the cost of the Company’s investment in an unconsolidated affiliate and its underlying equity as reflected in the unconsolidated affiliate’s financial statements generally result from costs of the Company’s investment that are not reflected on the unconsolidated affiliate’s financial statements.

Under the unconsolidated entity agreement, the Company will serve as the entity’s operating member, subject to authority and oversight of a board appointed by the Company and Alinda, and separately the Company will serve as manager and developer of the facility in exchange for management and development fees. The entity agreement includes various transfer restrictions and rights of first offer that will allow the Company to repurchase Alinda’s interest should Alinda wish to exit in the future.

7. Debt

Below is a listing of the Company’s outstanding debt, including finance leases, as of March 31, 2019 and December 31, 2018 (in thousands):


	Weighted Average
	Coupon Interest Rate at		March 31,		December 31,
	March 31, 2019 (1)	Maturities	2019		2018
	(unaudited)		(unaudited)
Unsecured Credit Facility
Revolving Credit Facility	3.83%	December 17, 2022	$	135,000	$	252,000
Term Loan I	3.50%	December 17, 2023		350,000		350,000
Term Loan II	3.53%	April 27, 2024		350,000		350,000
Senior Notes	4.75%	November 15, 2025		400,000		400,000
Lenexa Mortgage	4.10%	May 1, 2022		1,791		1,801
Finance Leases	4.33%	2019 - 2038		47,197		2,873
	3.96%			1,283,988		1,356,674
Less net debt issuance costs				(11,195)		(11,557)
Total outstanding debt, net			$	1,272,793	$	1,345,117

(1)

The coupon interest rates associated with Term Loan I and Term Loan II incorporate the effects of the Company’s interest rate swaps in effect as of March 31, 2019.

Credit Facilities, Senior Notes and Mortgage Notes Payable

(a) Unsecured Credit Facility – In November 2018, the Company executed an amendment to its amended and restated unsecured credit facility (the “unsecured credit facility”), which among other things included extending the term, modifying or eliminating certain covenants and reduced pricing by 20 basis points. The unsecured credit facility includes a $350 million term loan which matures on December 17, 2023, a $350 million term loan which matures on April 27, 2024, and an $820 million revolving credit facility which matures on December 17, 2022, with a one year extension option. Amounts outstanding under the amended unsecured credit facility bear interest at a variable rate equal to, at the Company’s election, LIBOR or a base rate, plus a spread that will vary depending upon the Company’s leverage ratio. For revolving credit loans, the spread ranges from 1.35% to 1.95% for LIBOR loans and 0.35% to 0.95% for base rate loans. For term loans, the spread ranges from 1.30% to 1.90% for LIBOR loans and 0.30% to 0.90% for base rate loans. The unsecured credit facility also provides for borrowing capacity of up to $200 million in various foreign currencies, and a $500 million accordion feature, subject to obtaining additional loan commitments.

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Under the unsecured credit facility, the capacity may be increased from the current capacity of $1.52 billion to $2.02 billion subject to certain conditions set forth in the credit agreement, including the consent of the administrative agent and obtaining necessary commitments. The Company is also required to pay a commitment fee to the lenders assessed on the unused portion of the unsecured revolving credit facility. At the Company’s election, it can prepay amounts outstanding under the unsecured credit facility, in whole or in part, without penalty or premium.

The Company’s ability to borrow under the amended unsecured credit facility is subject to ongoing compliance with a number of customary affirmative and negative covenants. As of March 31, 2019, the Company was in compliance with all of its covenants.

As of March 31, 2019, the Company had outstanding $835 million of indebtedness under the unsecured credit facility, consisting of $135.0 million of outstanding borrowings under the unsecured revolving credit facility and $700.0 million outstanding under the term loans, exclusive of net debt issuance costs of $6.1 million. In connection with the unsecured credit facility, as of March 31, 2019, the Company had additional letters of credit outstanding aggregating to $4.1 million. As of March 31, 2019, the weighted average interest rate for amounts outstanding under the unsecured credit facility, including the effects of interest rate swaps, was 3.57%.

The Company has also entered into certain interest rate swap agreements. See Note 8 – ‘Derivative Instruments’ for additional details.

(b) Senior Notes – On July 23, 2014, the Operating Partnership and QTS Finance Corporation, a subsidiary of the Operating Partnership formed solely for the purpose of facilitating the offering of the 5.875% Senior Notes due 2022 (collectively, the “Issuers”), the Company and certain of its other subsidiaries entered into a purchase agreement pursuant to which the Issuers issued $400 million aggregate principal amount of 4.75% Senior Notes due November 15, 2025 (the “Senior Notes”) in a private offering. The Senior Notes have an interest rate of 4.750% per annum and were issued at a price equal to 100% of their face value. The net proceeds from the offering were used to fund the redemption of, and satisfy and discharge the indenture pursuant to which the Issuers issued, all of their outstanding 5.875% Senior Notes and to repay a portion of the amount outstanding under the Company’s unsecured revolving credit facility. As of March 31, 2019, the outstanding net debt issuance costs associated with the Senior Notes were $5.2 million.

The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Operating Partnership’s existing subsidiaries (other than foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS Realty Trust, Inc., the Issuers or any other subsidiary guarantor, other than QTS Finance Corporation, the co-issuer of the Senior Notes. QTS Realty Trust, Inc. does not guarantee the Senior Notes and will not be required to guarantee the Senior Notes except under certain circumstances. The offering was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended, and the Senior Notes were issued pursuant to an indenture, dated as of November 8, 2017, among QTS, the Issuers, the guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee.

The annual remaining principal payment requirements as of March 31, 2019 per the contractual maturities, excluding extension options and excluding finance leases, are as follows (unaudited and in thousands):


2019	$	52
2020		71
2021		74
2022		136,594
2023		350,000
Thereafter		750,000
Total	$	1,236,791

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As of March 31, 2019, the Company was in compliance with all of its covenants.

8. Derivative Instruments

From time to time, the Company enters 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

The Company’s 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, the Company primarily uses interest rate swaps as part of its 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 the Company making fixed-rate payments over the life of the agreements without exchange of the underlying notional amount.

On April 5, 2017, the Company entered into forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from January 2, 2018 through December 17, 2021 and April 27, 2022, respectively, at approximately 3.3% assuming the current LIBOR spread of 1.3%.

On December 20, 2018, the Company entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from December 17, 2021 and April 27, 2022 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the execution of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, the Company entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.

The Company reflects its interest rate swap agreements, which are designated as cash flow hedges, at fair value as either assets or liabilities on the consolidated balance sheets within the “Other assets, net” or “Advance rents, security deposits and other liabilities” line items, as applicable. As of March 31, 2019, the fair value of interest rate swaps included an asset of $1.9 million as well as a liability of $7.7 million. As of December 31, 2018, the fair value of interest rate swaps included an asset of $5.3 million as well as a liability of $3.0 million.

The forward interest rate swap agreements are derivatives that currently qualify for hedge accounting whereby the Company records the effective portion of changes in fair value of the interest rate swaps in accumulated other comprehensive income or loss on the consolidated balance sheets and statements of comprehensive income which is subsequently reclassified into earnings in the period that the hedged forecasted transaction affects earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized within net income. The amount reclassified from other comprehensive income to interest income on the consolidated statements of operations was $0.5 million for the three months ended March 31, 2019. The amount reclassified from other comprehensive income to interest expense on the consolidated statements of operations was $0.4 million for the three months ended March 31, 2018. There was no ineffectiveness recognized for the three months ended March 31, 2019, and 2018. During the

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subsequent twelve months, beginning April 1, 2019, we estimate that $1.3 million will be reclassified from other comprehensive income as a reduction to interest expense.

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Interest rate derivatives and their fair values as of March 31, 2019 and December 31, 2018 were as follows (unaudited and in thousands):


				Fixed One Month
Notional Amount				LIBOR rate per			Fair Value
March 31, 2019		December 31, 2018		annum	Effective Date	Expiration Date	March 31, 2019		December 31, 2018
$	25,000	$	25,000	1.989%	January 2, 2018	December 17, 2021	$	131	$	331
	100,000		100,000	1.989%	January 2, 2018	December 17, 2021		523		1,318
	75,000		75,000	1.989%	January 2, 2018	December 17, 2021		392		990
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		213		667
	100,000		100,000	2.029%	January 2, 2018	April 27, 2022		436		1,341
	50,000		50,000	2.033%	January 2, 2018	April 27, 2022		212		666
	100,000		100,000	2.617%	January 2, 2020	December 17, 2023		(1,935)		(782)
	100,000		100,000	2.621%	January 2, 2020	April 27, 2024		(2,071)		(818)
	200,000		200,000	2.636%	December 17, 2021	December 17, 2023		(1,911)		(722)
	200,000		200,000	2.642%	April 27, 2022	April 27, 2024		(1,809)		(648)
$	1,000,000	$	1,000,000				$	(5,819)	$	2,343

Power Purchase Agreements

In March 2019, QTS entered into two 10 year agreements to purchase renewable energy equal to the expected electricity needs of the Company’s datacenters in Chicago, Illinois and Piscataway, New Jersey. These arrangements currently qualify for hedge accounting whereby the Company records 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 Company currently reflects these agreements, which are designated as cash flow hedges, at fair value as liabilities on the consolidated balance sheets within the “Advance rents, security deposits and other liabilities” line items.

Power purchase agreement derivatives and their fair values as of March 31, 2019 and December 31, 2018 were as follows (unaudited and in thousands):


				Fair Value
Counterparty	Facility	Effective Date	Expiration Date	March 31, 2019		December 31, 2018
Calpine Energy Solutions, LLC	Piscataway	3/8/2019	2/28/2029	$	(636)	$	—
Calpine Energy Solutions, LLC	Chicago	3/8/2019	2/28/2029		(1,055)		—
				$	(1,691)	$	—

9. Commitments and Contingencies

The Company is subject to various routine legal proceedings and other matters in the ordinary course of business. The Company currently does not have any litigation that would have material adverse impact on the Company’s financial statements.

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10. 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 March 31, 2019, the Operating Partnership had four classes of limited partnership units outstanding: Series A Preferred Stock Units, Series B Convertible Preferred Stock Units, Class A units of limited partnership interest (“Class A units”) and Class O LTIP units of limited partnership units (“Class O units”). The Class A units 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 following full vesting (if such unit is subject to vesting) based on formulas contained in the partnership agreement.

QTS Realty Trust, Inc.

In connection with its IPO, 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 the Company’s Chief Executive Officer to exchange 2% of his Operating Partnership units so he may have a vote proportionate to his economic interest in the Company. Also in connection with its IPO, QTS adopted the QTS Realty Trust, Inc. 2013 Equity Incentive Plan (the “2013 Equity Incentive Plan”), which authorized 1.75 million shares of Class A common stock to be issued under the 2013 Equity Incentive Plan, including options to purchase Class A common stock if exercised. On May 9, 2019, following approval by the Company’s stockholders at the Company’s 2019 Annual Meeting, the total number of shares available for issuance under the 2013 Equity Incentive Plan was increased by an additional 1,110,000.

In March 2019, the Compensation Committee completed a redesign of the long-term incentive program for executive officers with the following changes:

Issued 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 ending December 31, 2020 (Performance-Based FFO Units or “FFO Units”), with two-thirds of the earned shares of Class A common stock vesting at the end of the performance period when results have been certified and the remaining one-third of the shares vesting at the end of three years from the award grant date. The number of shares of Class A common stock subject to the awards will be earned 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.

Introduced 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 ending December 31, 2021 (the Performance-Based Relative TSR Units or “TSR Units”). The number of shares of Class A common stock subject to the awards will be earned from 0% to 200% of the target award based on TSR compared to an index. In addition, award payouts will be determined on a linear interpolation basis between threshold and target and target and maximum performance; and capped at the target performance level if our TSR is negative.

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The following is a summary of award activity under the 2010 Equity Incentive Plan and 2013 Equity Incentive Plan and related information for the three months ended March 31, 2019 (unaudited) :


	2010 Equity Incentive Plan					2013 Equity Incentive Plan
				Weighted					Weighted		Restricted
		Weighted		average			Weighted		average		Stock /		Weighted			Weighted			Weighted
	Number of	average		fair			average		fair		Deferred		average			average			average
	Class O units	exercise price		value		Options	exercise price		value		Stock		grant price		TSR Units	grant price		FFO Units	grant price
Outstanding at December 31, 2018	102,279	$	24.05	$	5.67	2,037,163	$	36.86	$	7.10	420,309		$	37.83	—	$	—	—	$	—
Granted	—		—		—	124,955		42.01		7.56	265,231			42.01	86,089		54.64	86,089		42.01
Exercised/Vested (1)	—		—		—	(96,589)		27.82		5.58	(95,330)			37.12	—		—	—		—
Cancelled/Expired	—		—		—	(60,285)		46.07		9.62	(54,041)	(2)		38.73	—		—	—		—
Outstanding at March 31, 2019	102,279	$	24.05	$	5.67	2,005,244	$	37.34	$	7.12	536,169		$	39.93	86,089	$	54.64	86,089	$	42.01

(1)

This represents 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. This also represents Class O units which were converted to Class A units and options to purchase Class A common stock which were exercised for their respective columns.

(2)

Includes restricted Class A common stock surrendered by certain employees to satisfy their statutory minimum federal and state tax obligations associated with the vesting of restricted common stock.

The assumptions and fair values for restricted stock and options to purchase shares of Class A common stock granted for the three months ended March 31, 2019 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.


		Three Months Ended March 31, 2019
Fair value of FFO units and restricted stock granted		$ 42.01
Fair value of TSR units granted		$ 54.64
Fair value of options granted		$ 7.56
Expected term (years)		5.5
Expected volatility		28%
Expected dividend yield		4.19%
Expected risk-free interest rates		2.56%

The following tables summarize information about awards outstanding as of March 31, 2019 (unaudited).


	Operating Partnership Awards Outstanding
				Weighted average
			Awards	remaining
	Exercise prices		outstanding	vesting period (years)
Class O Units	$	20.00 - 25.00	102,279	—
Total Operating Partnership awards outstanding			102,279


	QTS Realty Trust, Inc. Awards Outstanding
				Weighted average
			Awards	remaining
	Exercise prices		outstanding	vesting period (years)
Restricted stock	$	—	536,169	2.0
TSR units		—	86,089	2.8
FFO units		—	86,089	2.8
Options to purchase Class A common stock	$	21.00 - 50.66	2,005,244	0.8
Total QTS Realty Trust, Inc. awards outstanding			2,713,591

Any remaining nonvested awards are valued as of the grant date and generally vest ratably over a defined service period. As of March 31, 2019 there were approximately 0.6 million nonvested restricted Class A common stock and options to purchase Class A common stock outstanding, respectively. As of March 31, 2019 the Company had $30.6 million of

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unrecognized equity-based compensation expense which will be recognized over a remaining weighted-average vesting period of 1.1 years. The total intrinsic value of Class O units and options to purchase Class A common stock outstanding at March 31, 2019 was $20.5 million.

Dividends and Distributions

The following tables present quarterly cash dividends and distributions paid to QTS’ common and preferred stockholders and the Operating Partnership’s unit holders for the three months ended March 31, 2019 and 2018 (unaudited):


Three Months Ended March 31, 2019
				Aggregate
		Per Share and		Dividend/Distribution
Record Date	Payment Date	Per Unit Rate		Amount (in millions)
Common Stock
December 21, 2018	January 8, 2019	$	0.41	$	23.7
				$	23.7

Series A Preferred Stock
December 31, 2018	January 15, 2019	$	0.45	$	1.9
				$	1.9

Series B Preferred Stock
December 31, 2018	January 15, 2019	$	1.63	$	5.1
				$	5.1


Three Months Ended March 31, 2018
				Aggregate
		Per Common Share and		Dividend/Distribution
Record Date	Payment Date	Per Unit Rate		Amount (in millions)
Common Stock
December 5, 2017	January 5, 2018	$	0.39	$	22.2
				$	22.2

Additionally, subsequent to March 31, 2019, the Company paid the following dividends:

On April 4, 2019, the Company paid its regular quarterly cash dividend of $0.44 per common share and per unit in the Operating Partnership to stockholders and unit holders of record as of the close of business on March 20, 2019.

On April 15, 2019, the Company paid a quarterly cash dividend of approximately $0.45 per share on its Series A Preferred Stock to holders of Series A Preferred Stock of record as of the close of business on March 31, 2019.

On April 15, 2019, the Company paid a quarterly cash dividend of approximately $1.63 per share on its Series B Preferred Stock to holders of Series B Preferred Stock of record as of the close of business on March 31, 2019.

Equity Issuances

In March 2017, the Company established an “at-the-market” equity offering program (the “ATM Program”) pursuant to which the Company may issue, from time to time, up to $300 million of its Class A common stock. The Company issued no shares under the ATM Program during the three months ended March 31, 2019. The Company’s ATM program expired in March 2019.

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On March 15, 2018, QTS issued 4,280,000 shares of 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock (“Series A Preferred Stock”) with a liquidation preference of $25.00 per share, which included 280,000 shares of the underwriters’ partial exercise of their option to purchase additional shares. The Company used the net proceeds of approximately $103.2 million to repay amounts outstanding under its unsecured revolving credit facility. In connection with the issuance of the Series A Preferred Stock, on March 15, 2018 the Operating Partnership issued to the Company 4,280,000 Series A Preferred Units, which have economic terms that are substantially similar to the Company’s Series A Preferred Stock. The Series A Preferred Units were issued in exchange for the Company’s contribution of the net offering proceeds of the offering of the Series A Preferred Stock to the Operating Partnership.

Dividends on the Series A Preferred Stock are payable quarterly in arrears on or about the 15th day of each January, April, July and October. The first dividend on the Series A Preferred Stock was paid on April 16, 2018, in the amount of $0.14844 per share for the period March 15, 2018 through April 14, 2018. The Series A Preferred Stock does not have a stated maturity date and is not subject to any sinking fund or mandatory redemption provisions. Upon liquidation, dissolution or winding up, the Series A Preferred Stock will rank senior to common stock and pari passu with the Series B Preferred Stock with respect to the payment of distributions and other amounts. Except in instances relating to preservation of QTS’s qualification as a REIT or pursuant to the Company’s special optional redemption right, the Series A Preferred Stock is not redeemable prior to March 15, 2023. On and after March 15, 2023, the Company may, at its option, redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, for cash at a redemption price of $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.

Upon the occurrence of a change of control, the Company has a special optional redemption right that enables it to redeem the Series A Preferred Stock, in whole, at any time, or in part, from time to time, within 120 days after the first date on which a change of control has occurred resulting in neither QTS nor the surviving entity having a class of common shares listed on the NYSE, NYSE Amex, or NASDAQ or the acquisition of beneficial ownership of its stock entitling a person to exercise more than 50% of the total voting power of all our stock entitled to vote generally in election of directors. The special optional redemption price is $25.00 per share, plus any accrued and unpaid dividends (whether or not declared) to, but not including, the date of redemption.

Upon the occurrence of a change of control, holders will have the right (unless the Company has elected to exercise its special optional redemption right to redeem their Series A Preferred Stock) to convert some or all of such holder’s Series A Preferred Stock into a number of shares of Class A common stock, par value $0.01 per share, equal to the lesser of:

the quotient obtained by dividing (i) the sum of the $25.00 liquidation preference plus the amount of any accrued and unpaid dividends (whether or not declared) to, but not including, the change of control conversion date (unless the change of control conversion date is after a record date for a Series A Preferred Stock dividend payment and prior to the corresponding Series A Preferred Stock dividend payment date, in which case no additional amount for such accrued and unpaid dividend will be included in this sum) by (ii) the Common Stock Price; and

1.46929 (i.e., the Share Cap);

subject, in each case, to certain adjustments and provisions for the receipt of alternative consideration of equivalent value as described in the prospectus supplement for the Series A Preferred Stock.

On June 25, 2018, QTS issued 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual Preferred Stock (“Series B Preferred Stock”) with a liquidation preference of $100.00 per share, which included 412,500 shares the underwriters purchased pursuant to the exercise of their overallotment option in full. The Company used the net proceeds of approximately $304 million to repay amounts outstanding under its unsecured revolving credit facility. In connection with the issuance of the Series B Preferred Stock, on June 25, 2018 the Operating Partnership issued to the Company 3,162,500 Series B Preferred Units, which have economic terms that are substantially similar to the Company’s Series B Preferred Stock. The Series B Preferred Units were issued in exchange for the Company’s contribution of the net offering proceeds of the offering of the Series B Preferred Stock to the Operating Partnership.

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Dividends on the Series B Preferred Stock are payable quarterly in arrears on or about the 15th day of each January, April, July and October. The first dividend on the Series B Preferred Stock was paid on October 15, 2018, in the amount of $1.9861111 per share for the period June 25, 2018 through October 14, 2018. The Series B Preferred Stock is convertible by holders into shares of Class A common stock at any time at the then-prevailing conversion rate. The conversion rate as of March 31, 2019 is 2.1278 shares of the Company’s Class A common stock per share of Series B Preferred Stock. The Series B Preferred Stock does not have a stated maturity date. Upon liquidation, dissolution or winding up, the Series B Preferred Stock will rank senior to common stock and pari passu with the Series A Preferred Stock with respect to the payment of distributions and other amounts. The Series B Preferred Stock will not be redeemable by the Company. At any time on or after July 20, 2023, the Company may at its option cause all (but not less than all) outstanding shares of the Series B Preferred Stock to be automatically converted into the Company’s Class A common stock at the then-prevailing conversion rate if the closing sale price of the Company’s Class A common stock is equal to or exceeds 150% of the then-prevailing conversion price for at least 20 trading days in a period of 30 consecutive trading days, including the last trading day of such 30-day period, ending on the trading day prior to the issuance of a press release announcing the mandatory conversion.

If a holder converts its shares of Series B Preferred Stock at any time beginning at the opening of business on the trading day immediately following the effective date of a fundamental change (as described in the prospectus supplement) and ending at the close of business on the 30th trading day immediately following such effective date, the holder will automatically receive a number of shares of the Company’s Class A common stock equal to the greater of:

the sum of (i) a number of shares of the Company’s Class A common stock, as may be adjusted, as described in the Articles Supplementary for the 6.50% Series B Cumulative Convertible Perpetual Preferred Stock filed with the State Department of Assessments and Taxation of Maryland on June 22, 2018 (the “Articles Supplementary”) and (ii) the make-whole premium described in the Articles Supplementary; and

a number of shares of the Company’s Class A common stock equal to the lesser of (i) the liquidation preference divided by the average of the daily volume weighted average prices of the Company’s Class A common stock for ten days preceding the effective date of a fundamental change and (ii) 5.1020 (subject to adjustment).

In February 2019, QTS conducted an underwritten offering of 7,762,500 shares of its Class A common stock, consisting of 4,000,000 shares issued by the Company during the first quarter of 2019 and 3,762,500 shares which will be issued on a forward basis, in each case at a price of $41.50 per share. The Company received net proceeds of approximately $159 million from the issuance of 4,000,000 shares during the first quarter, which it used to repay amounts outstanding under its unsecured revolving credit facility. The Company expects to physically settle the forward sale (by the delivery of shares of common stock) and receive proceeds of approximately $148 million from the sale of the 3,762,500 shares of common stock by March 1, 2020, although the Company has the right to elect settlement prior to that time. As of March 31, 2019 the Company had not settled any shares from the forward sale. QTS has concluded that the forward sale agreements meet the derivative scope exception for certain contracts involving an entity’s own equity. QTS has not yet received any proceeds from the forward contract and no amounts have been or will be recorded in equity on the Company’s balance sheet until the forward sale agreements settle. The initial forward sale price is subject to daily adjustment based on a floating interest rate factor, and will decrease by other fixed amounts specified in the forward sale agreement. Until settlement of the forward sale agreements, QTS’s EPS dilution resulting from the agreements, if any, is determined using the two-class method.

QTS Realty Trust, Inc. Employee Stock Purchase Plan

In June 2015, the Company established the QTS Realty Trust, Inc. Employee Stock Purchase Plan (the “2015 Plan”) to give eligible employees the opportunity to purchase, through payroll deductions, shares of the Company’s Class A common stock in the open market by an independent broker with the Company paying brokerage commissions and fees associated with such share purchases. The 2015 Plan became effective July 1, 2015. The Company reserved 250,000 shares of its Class A common stock for purchase under the 2015 Plan, which were registered pursuant to a registration statement on Form S-8 filed on June 17, 2015.

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On May 4, 2017, the stockholders of the Company approved an amendment and restatement of the Plan (the “2017 Plan”). The 2017 Plan became effective July 1, 2017 and is administered by the compensation committee (the “Compensation Committee”) of the board of directors (or by a committee of one or more persons appointed by it or the board of directors). The 2017 Plan permits participants to purchase the Company’s Class A common stock at a discount of up to 10% (as determined by the Compensation Committee). Employees of the Company and its majority-owned subsidiaries who have been employed for at least thirty days and who perform at least thirty hours of service per week for the Company are eligible to participate in the 2017 Plan, excluding any employee who, at any time during which the payroll deductions are made on behalf of the participating employees to purchase stocks, owns shares representing five percent or more of the total combined voting power or value of all classes of shares of the Company, or who is a Section 16 officer. Under the 2017 Plan, there are four purchase periods per year, and participants may deduct a minimum of $20 per paycheck and a maximum of $1,000 per paycheck towards the purchase of shares. Shares purchased under the 2017 Plan are subject to a one-year holding period following the purchase date, during which they may not be sold or transferred.

11. Related Party Transactions

The Company periodically executes transactions with entities affiliated with its Chairman and Chief Executive Officer. Such transactions include automobile, furniture and equipment purchases as well as building operating lease payments and receipts, and reimbursement for the use of a private aircraft service by the Company’s officers and directors.

The transactions which occurred during the three months ended March 31, 2019 and 2018 are outlined below (unaudited and in thousands):


	Three Months Ended
	March 31,
	2019		2018
Tax, utility, insurance and other reimbursement	$	261	$	261
Rent expense		254		254
Capital assets acquired		54		158
Total	$	569	$	673

12. Noncontrolling Interest

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

Commencing at any time beginning November 1, 2014, at the election of the holders of the noncontrolling interest, the 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 March 31, 2019, the noncontrolling ownership interest percentage of QualityTech, LP was 10.8%.

13. Earnings per share of QTS Realty Trust, Inc.

Basic income per share is calculated by dividing the net income attributable to common shares by the weighted average number of common shares outstanding during the period. Diluted income per share adjusts basic income per share for the effects of potentially dilutive common shares. Unvested restricted stock awards and the Company’s forward sale contract described in Note 10 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 contract 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 per share is as follows (in thousands, except per share data, and unaudited):


	Three Months Ended
	March 31,
	2019		2018
Numerator:
Net income (loss)	$	21,148	$	(252)
Loss (income) attributable to noncontrolling interests		(1,590)		29
Preferred stock dividends		(7,045)		(328)
Earnings attributable to participating securities		(1,935)		(258)
Net income (loss) available to common stockholders after allocation of participating securities	$	10,578	$	(809)
Denominator:
Weighted average shares outstanding - basic		51,948		50,279
Effect of Class O units, TSR units and options to purchase Class A common stock on an "as if" converted basis		347		—
Weighted average shares outstanding - diluted		52,295		50,279

Basic net income (loss) per share	$	0.20	$	(0.02)

Diluted net income (loss) per share	$	0.20	$	(0.02)

Note: The table above does not include Class A partnership units of 6.7 million and 6.6 million for the three months ended March 31, 2019, and 2018, respectively, as their inclusion would have been antidilutive. Also does not include 0.5 million reflecting the effects of Class O units and options to purchase common stock on an "as if" converted basis for the three months ended March 31, 2018, and 6.7 million reflecting the effects of Series B Convertible preferred stock on an “as if” converted basis for the three months ended March 31, 2019, as their respective inclusion would have also been antidilutive.

14. Contracts with Customers

Future minimum payments to be received under non-cancelable customer contracts including both lease rental revenue components and nonlease revenue components (inclusive of payments for contracts which have not yet commenced, and exclusive of recoveries of operating costs from customers) are as follows for the years ending December 31 (unaudited and in thousands):


2019 (April - December)	$	277,683
2020		308,650
2021		250,263
2022		163,494
2023		88,227
Thereafter		107,386
Total	$	1,195,703

15. 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 the Company 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.

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

Derivative Contracts:

Interest rate swaps

Currently, the Company uses interest rate swaps to manage its 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, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Although the Company has determined that the majority of the inputs used to value its derivatives fall within Level 2 of the fair value hierarchy, the credit valuation adjustments associated with its derivatives utilize Level 3 inputs, such as estimates of current credit spreads to evaluate the likelihood of default by the Company and its counterparties. However, as of March 31, 2018, the Company assessed the significance of the impact of the credit valuation adjustments on the overall valuation of its derivative positions and has determined that the credit valuation adjustments are not significant to the overall valuation of its derivatives. As a result, the Company has determined that its derivative valuations in their entirety are classified in Level 2 of the fair value hierarchy. The Company does not have any fair value measurements on a recurring basis using significant unobservable inputs (Level 3) as of March 31, 2018 or December 31, 2017.

Power Purchase Agreements

In March 2019, Company began using energy hedges to manage risk related to energy prices. The 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, the Company incorporates credit valuation adjustments to appropriately reflect both its own nonperformance risk and the respective counterparty’s nonperformance risk in the fair value measurements. In adjusting the fair value of its derivative contracts for the effect of nonperformance risk, the Company has considered the impact of netting and any applicable credit enhancements, such as collateral postings, thresholds, mutual puts, and guarantees.

Nonrecurring sale of assets: For the three months ended March 31, 2019, the company recognized a gain on the sale of real estate assets that is discussed in detail in Note 6. In order to determine fair value of the noncash equity consideration received for the sale of the assets, the Company utilized estimation models to derive the fair value of the equity interest received in the transaction. These estimation models consisted of a discounted cash flow analysis that included Level 3 inputs including market rents, discount rates, expected occupancy and estimates of additional capital expenditures, and capitalization rates derived from market data.

Credit facility and Senior Notes: The Company’s unsecured credit facility did not have interest rates which were materially different than current market conditions and therefore, the fair value approximated the carrying value. The fair value of the Company’s Senior Notes was estimated using Level 2 “significant other observable inputs,” primarily based on quoted market prices for the same or similar issuances. At March 31, 2019, the fair value of the Senior Notes was approximately $387.0 million.

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Other debt instruments: The fair value of the Company’s other debt instruments (including finance leases and mortgage notes payable) were estimated in the same manner as the unsecured credit facility above. Similarly, each of these instruments did not have interest rates which were materially different than current market conditions and therefore, the fair value of each instrument approximated the respective carrying values.

16. Subsequent Events

In April 2019, the Company paid its regular quarterly cash dividends on its common stock, Series A Preferred Stock and Series B Preferred Stock. See the ‘Dividends and Distributions’ section of Note 10 for additional details.

In April 2019, QTS completed the acquisition of two data centers in the Netherlands for approximately $44 million in cash, including closing costs. The two facilities, in Groningen and Eemshaven, currently have approximately 160,000 square feet of raised floor capacity and 30 megawatts of combined gross power capacity built out and fully available. The acquisition is expected to be accounted for as an asset acquisition.

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

The following discussion and analysis presents the financial condition and results of operations of QTS Realty Trust, Inc., a Maryland corporation (“QTS”), which includes the operations of QualityTech, LP (the “Operating Partnership”), for the three months ended March 31, 2019 and 2018. You should read the following discussion and analysis in conjunction with QTS’ and the Operating Partnership’s accompanying consolidated financial statements and related notes contained elsewhere in this Form 10-Q. We believe it is important for investors to understand the few differences between the financial statements of QTS and the Operating Partnership. See “Explanatory Note” for an explanation of these few differences. Since the financial data presented in this Item 2 does not contain any differences between QTS and the Operating Partnership, all periods presented reflect the operating results of both QTS and the Operating Partnership.

Forward-Looking Statements

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

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

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

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

global, national and local economic conditions;

risks related to 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;

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

our failure to qualify and maintain QTS’ qualification as a REIT;

environmental uncertainties and risks related to natural disasters;

financial market fluctuations;

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

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

While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. Any forward-looking statement speaks only as of the date on which it was made. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. For a further discussion of these and other factors that could cause our future results to differ materially from any forward-looking statements, see the section entitled “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2018 and Item 1A. “Risk Factors” of this Form 10-Q.

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 1,100 customers in the financial services, healthcare, retail, government, and technology industries. We build out our data center facilities to accommodate both multi-tenant environments (hybrid colocation) and for executed leases that require significant amounts of space and power (hyperscale), depending on the needs of each facility at that time. We believe that we own and operate one of the largest portfolios of multi-tenant data centers in the United States, as measured by gross square footage, and have the capacity to nearly double our sellable data center raised floor space without constructing or acquiring any new buildings. In addition, we own more than 650 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 March 31, 2019, we operated a portfolio of 24 data centers located throughout the United States, Canada, Europe and Asia. 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.

QTS is a Maryland corporation formed on May 17, 2013 and is the sole general partner and majority owner of the Operating Partnership. Our Class A common stock trades on the New York Stock Exchange under the ticker symbol “QTS.”

We account for the operations of all of our properties in one reporting segment.

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As of March 31, 2019, QTS owned an approximate 89.2% ownership interest in the Operating Partnership. Substantially all of our assets are held by, and our operations are conducted through, the Operating Partnership.

The Operating Partnership is a Delaware limited partnership formed on August 5, 2009 and was QTS’ historical predecessor prior to QTS’ initial public offering on October 13, 2013 (“IPO”), having operated the Company’s business until the IPO.

We believe that QTS has operated and has been organized in conformity with the requirements for qualification and taxation as a REIT commencing with our taxable year ended December 31, 2013. Our qualification as a REIT, and maintenance of such qualification, depends upon our ability to meet, on a continuing basis, various complex requirements under the Internal Revenue Code of 1986, as amended (the “Code”) relating to, among other things, the sources of our gross income, the composition and values of our assets, our distributions to our stockholders and the concentration of ownership of our equity shares.

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 1,100 different companies of all sizes representing an array of industries, each with unique and varied business models and needs. We serve Fortune 1000 companies as well as small and medium-sized businesses, or SMBs, including financial institutions, healthcare companies, retail companies, government agencies, communications service providers, software companies and global Internet companies.

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

As a result of our diverse customer base, customer concentration in our portfolio is limited. As of March 31, 2019, only five of our more than 1,100 customers individually accounted for more than 3% of our monthly recurring revenue (“MRR”) (as defined below), with the largest customer accounting for approximately 12.5% of our MRR and the next largest customer accounting for only 5.6% of our MRR.

Our Portfolio

As of March 31, 2019, including 100% of unconsolidated joint ventures for which we are affiliated, we operated 24 data centers located throughout the United States, Canada, Europe and Asia, containing an aggregate of approximately 6.2 million gross square feet of space, including approximately 2.7 million “basis-of-design” raised floor square feet (approximately 96.3% of which is owned by us including our data center in Santa Clara which is subject to a long-term ground lease), which represents the total sellable data center raised floor potential of our existing data center facilities. This reflects the maximum amount of space in our existing buildings that could be leased following full build-out, depending on the space and power configuration that we deploy. As of March 31, 2019, this space included approximately 1.5 million raised floor operating net rentable square feet, or NRSF, plus approximately 1.2 million square feet of additional raised floor in our development pipeline, of which approximately 119,000 raised floor square feet is expected to become operational by December 31, 2019. Of the total 1.2 million raised floor square feet in our development pipeline that is expected to become operational by December 31, 2019, approximately 51,000 square feet was related to customer leases which had been executed as of March 31, 2019 but not yet commenced. Our facilities collectively have access to approximately 667 megawatts (“MW”) of available utility power. Access to power is typically the most limiting and expensive component in developing a data center and, as such, we believe our significant access to power represents an important competitive advantage.

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The following table presents an overview of the portfolio of operating properties that we own or lease, based on information as of March 31, 2019:


			Net Rentable Square Feet (Operating NRSF) (1)
											Available	Basis of	Current
		Gross									Utility	Design	Raised
	Year	Square	Raised	Office &	Supporting		%		Annualized		Power	("BOD")	Floor as a
Property	Acquired (2)	Feet (3)	Floor (4)	Other (5)	Infrastructure (6)	Total	Occupied (7)		Rent (8)		(MW) (9)	NRSF	% of BOD
Richmond, VA	2010	1,318,353	167,309	51,093	178,854	397,256	70.9	%	$	40,048,363	110	557,309	30.0	%
Atlanta, GA (Metro)	2006	968,695	486,706	36,953	346,263	869,922	97.9	%	$	106,761,525	72	527,186	92.3	%
Irving, TX	2013	698,000	174,160	6,981	179,083	360,224	94.7	%	$	51,870,922	140	275,701	63.2	%
Princeton, NJ	2014	553,930	58,157	2,229	111,405	171,791	100.0	%	$	10,206,631	22	158,157	36.8	%
Chicago, IL	2014	474,979	56,000	1,786	58,182	115,968	84.0	%	$	12,534,696	24	215,855	25.9	%
Ashburn, VA	2017	445,000	19,500	6,096	31,988	57,584	90.7	%	$	3,690,636	50	178,000	11.0	%
Suwanee, GA	2005	369,822	205,608	8,697	107,128	321,433	93.4	%	$	56,296,509	36	205,608	100.0	%
Piscataway, NJ	2016	360,000	98,820	14,311	100,151	213,282	88.9	%	$	18,051,649	111	176,000	56.1	%
Fort Worth, TX	2016	261,836	10,600	—	19,438	30,038	98.9	%	$	2,084,513	50	80,000	13.3	%
Santa Clara, CA*	2007	135,322	59,905	944	45,094	105,943	72.5	%	$	18,466,859	11	80,940	74.0	%
Sacramento, CA	2012	92,644	54,595	2,794	23,916	81,305	37.5	%	$	10,474,745	8	54,595	100.0	%
Dulles, VA	2017	87,159	30,545	5,997	32,892	69,434	62.9	%	$	16,494,315	13	48,270	63.3	%
Leased facilities **	2006 & 2015	192,588	63,937	18,650	41,901	124,488	83.3	%	$	26,841,451	14	84,549	75.6	%
Other ***	Misc.	147,435	22,380	49,337	30,074	101,791	68.9	%	$	6,582,622	5	22,380	100.0	%
Consolidated properties		6,105,763	1,508,222	205,868	1,306,369	3,020,459	88.9	%	$	380,405,436	667	2,664,550	56.6	%

Unconsolidated JV Properties - at the JV's 100% Share (10)
Manassas, VA	2018	118,031	11,200	12,663	39,044	62,907	100.0	%	$	6,047,136	24	66,324	16.9	%

Total Properties		6,223,794	1,519,422	218,531	1,345,413	3,083,366	89.0	%	$	386,452,572	691	2,730,874	55.6	%

(1)

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

(2)

Represents the year a property was acquired or, in the case of a property under lease, the year our initial lease commenced for the property.

(3)

With respect to our owned properties, gross square feet represents the entire building area. With respect to leased properties, gross square feet represents that portion of the gross square feet subject to our lease. Gross square feet includes 347,261 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 space is occupied (1,112,529 square feet as of March 31, 2019) divided by leasable raised floor based on the current configuration of the properties (1,249,529 square feet as of March 31, 2019), 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 cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from booked-not-billed contracts as 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 March 31, 2019.

(10)

Represents the Company’s unconsolidated joint venture at the JV’s 100% share. QTS’s pro rata share of the JV is 50%.

* Subject to long term ground lease.

** Includes 9 facilities. All facilities are leased, including those subject to finance leases.

*** Consists of Miami, FL; Lenexa, KS; Overland Park, KS; and Duluth, GA facilities.

Key Operating Metrics

The following sets forth definitions for our key operating metrics. These metrics may differ from similar definitions used by other companies.

Monthly Recurring Revenue (“MRR”). We calculate MRR as monthly contractual revenue under signed leases as of a particular date, which includes revenue from our rental and cloud and managed services activities, but excludes customer recoveries, deferred set-up fees, variable related revenues, non-cash revenues and other one-time revenues. MRR does not include the impact from booked-not-billed leases as of a particular date, unless otherwise specifically noted. MRR does not reflect any accounting associated with any free rent, rent abatements or future scheduled rent increases and also excludes operating expense and power reimbursements.

Annualized Rent . We define annualized rent as MRR multiplied by 12.

Rental Churn . We define rental churn as the MRR lost in the period from a customer intending to fully exit our platform in the near term compared to the total MRR at the beginning of the period.

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Leasable Raised Floor . We define leasable raised floor as the amount of raised floor square footage that we have leased plus the available capacity of raised floor square footage that is in a leasable format as of a particular date and according to a particular product configuration. The amount of our leasable raised floor may change even without completion of new development projects due to changes in our configuration of space.

Percentage (%) Occupied and Billing Raised Floor. We define percentage occupied and billing raised floor as the square footage that is subject to a signed lease for which billing has commenced as of a particular date compared to leasable raised floor based on the current configuration of the properties as of that date, expressed as a percentage.

Booked-not-Billed. We define booked-not-billed as our customer leases that have been signed, but for which lease payments have not yet commenced.

Factors That May Influence Future Results of Operations and Cash Flows

Recent Accounting Pronouncements. We adopted the provisions of ASC Topic 606, Revenue from Contracts with Customers , effective January 1, 2018. We also adopted ASC Topic 842, Leases, effective January 1, 2019. For additional information with respect to the impact of the standards on our financial condition and results of operations, refer to Note 2 – Summary of Significant Accounting Policies.

Revenue. Our revenue growth will depend on our ability to maintain the historical occupancy rates of leasable raised floor, lease currently available space, lease new capacity that becomes available as a result of our development and redevelopment activities, attract new customers and continue to meet the ongoing technological requirements of our customers. As of March 31, 2019, we had in place customer leases generating revenue for approximately 89% of our leasable raised floor. Our ability to grow revenue also will be affected by our ability to maintain or increase rental rates at our properties. Future economic downturns, regional downturns or downturns in the technology industry, new technological developments, evolving industry demands and other similar factors could impair our ability to attract new customers or renew existing customers’ leases on favorable terms, or at all, and could adversely affect our customers’ ability to meet their obligations to us. Negative trends in one or more of these factors could adversely affect our revenue in future periods, which would impact our results of operations and cash flows. We also at times may elect to reclaim space from customers in a negotiated transaction where we believe that we can redevelop and/or re-lease that space at higher rates, which may cause a decrease in revenue until the space is re-leased.

Leasing Arrangements. As of March 31, 2019, 45% of our MRR came from customers which individually occupied greater than or equal to 6,600 square feet of space (or approximately 1 MW of power), with the remaining 55% attributable to customers utilizing less than 6,600 square feet of space. As of March 31, 2019, approximately 52% of our MRR was attributable to the metered power model, the majority of which is comprised of customers that individually occupy greater than 6,600 square feet of space. Under the metered power model, the customer pays us a fixed monthly rent amount, plus reimbursement of certain other operating costs, including actual costs of sub-metered electricity used to power its data center equipment and an estimate of costs for electricity used to power supporting infrastructure for the data center, expressed as a factor of the customer’s actual electricity usage. Fluctuations in our customers’ utilization of power and the supplier pricing of power do not significantly impact our results of operations or cash flows under the metered power model. These leases generally have a minimum term of five years. As of March 31, 2019, the remaining approximately 48% 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 leases generally have a term of three years or less.

Scheduled Lease Expirations. Our ability to minimize rental churn and customer downgrades at renewal and renew, lease and re-lease expiring space will impact our results of operations and cash flows. Leases which have commenced billing representing approximately 15% and 13% of our total leased raised floor are scheduled to expire during the years ending December 31, 2019 (including all month-to-month leases) and 2020, respectively. These leases also represented

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approximately 24% and 19%, respectively, of our annualized rent as of March 31, 2019. Given that our average rent for larger contracts tend to be at or below market rent at expiration, as a general matter, based on current market conditions, we expect that expiring rents will be at or below the then-current market rents.

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 or the issuance of additional equity. We believe that we have sufficient access to capital from our current cash and cash equivalents, borrowings under our credit facilities to fund our redevelopment projects, and the forward equity transaction we completed during the three months ended March 31, 2019.

Unconsolidated joint venture. On February 22, 2019, we entered into a joint venture with Alinda, a premier infrastructure investment firm, with respect to our Manassas data center. At closing, we contributed cash and our Manassas data center (a 118,000 square foot hyperscale data center under development in Manassas, Virginia), and Alinda contributed cash, in each case in exchange for a 50% interest in the joint venture. The Manassas data center, which is currently leased to a global cloud-based software company pursuant to a 10-year lease agreement, was contributed at an expected stabilized value upon completion of approximately $240 million. At the closing, we received approximately $53 million in net proceeds, which was funded from the cash contributed by Alinda and also borrowings under a $164.5 million secured credit facility entered into by the joint venture at closing that carries a rate of LIBOR plus 2.25%. We used these distributions to pay down our revolving credit facility and for general corporate purposes. Under the joint venture agreement, we will receive additional distributions in the future as and when we complete development of each phase of the Manassas data center and place it into service, which allows us to receive distributions for Alinda’s share of the joint venture based on the expected full stabilization of the asset. These distributions will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the joint venture. Under the joint venture agreement, we will serve as the joint venture’s operating member, subject to authority and oversight of a board appointed by us and Alinda, and separately we will serve as manager and developer of the facility in exchange for management and development fees. The joint venture agreement includes various transfer restrictions and rights of first offer that will allow us to repurchase Alinda’s interest should Alinda wish to exit in the future. In addition, we have agreed to provide Alinda an opportunity to invest in future similar entities based on similar terms and a comparable capitalization rate. This joint venture is reflected as an unconsolidated joint venture on our reported financial statements beginning in the first quarter of 2019.

Operating Expenses. Our operating expenses generally consist of direct personnel costs, utilities, property and ad valorem taxes, insurance and site maintenance costs and rental expenses on our ground and building leases. In particular, our buildings require significant power to support the data center operations conducted in them. Although substantially all of our long-term leases - leases with a term greater than three years - contain reimbursements for certain operating expenses, we will not in all instances be reimbursed for all of the property operating expenses we incur. We also incur general and administrative expenses, including expenses relating to senior management, our in-house sales and marketing organization, cloud and managed services support personnel and legal, human resources, accounting and other expenses related to professional services. We also will incur additional expenses arising from being a publicly traded company, including employee equity-based compensation. Increases or decreases in our operating expenses will impact our results of operations and cash flows. We expect to incur additional operating expenses as we continue to expand.

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General Leasing Activity

The following leasing and booked-not-billed statistics include QTS’ 50% pro rata share of revenue from the unconsolidated joint venture.

Below our sales activity is outlined for the three months ended March 31, 2019:

Annualized Rent of

Incremental

Number of

Total

Annualized rent

New and Modified

Annualized Rent, Net

Period

Leases

Leased sq ft

per leased sq ft

Lease

of Downgrades

New/modified leases signed

Three Months Ended March 31, 2019

520

33,914

477

16,169,892

11,304,724

Number of

Renewed

Total

Annualized rent

Period

Leases

Leased sq ft

per leased sq ft

Annualized Rent

Rent Change

Renewed Leases (1)

Three Months Ended March 31, 2019

11,596

988

11,456,028

1.6

(1)

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

The following table outlines the booked-not-billed (“BNB”) balance as of March 31, 2019 and how that will affect revenue in 2019 and subsequent years:


Booked-not-billed ("BNB")		2019		2020		Thereafter		Total
MRR	$	2,483,528	$	1,023,329	$	1,060,358	$	4,567,215
Incremental revenue		14,095,278		8,308,813		12,724,296
Annualized revenue	$	29,802,336	$	12,279,948	$	12,724,296	$	54,806,580

The Company estimates the remaining cost to provide the space, power, connectivity and other services to the customer contracts which had not billed as of March 31, 2019 to be approximately $30 million. This estimate generally includes customers with newly contracted space of more than 3,300 square feet of raised floor space. The space, power, connectivity and other services provided to customers that contract for smaller amounts of space is generally provided by existing space which was previously developed.

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Results of Operations

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Changes in revenues and expenses for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 are summarized below (unaudited and in thousands):


	Three Months Ended March 31,
	2019		2018		$ Change		% Change
Revenues:
Rental	$	98,596	$	88,415	$	10,181	12	%
Variable lease revenue from recoveries		10,793		11,513		(720)	(6)	%
Other		3,300		13,769		(10,469)	(76)	%
Total revenues		112,689		113,697		(1,008)	(1)	%
Operating expenses:
Property operating costs		34,103		37,740		(3,637)	(10)	%
Real estate taxes and insurance		3,367		2,905		462	16	%
Depreciation and amortization		38,788		35,913		2,875	8	%
General and administrative		19,891		22,234		(2,343)	(11)	%
Transaction and integration costs		1,214		920		294	32	%
Restructuring		—		8,530		(8,530)	(100)	%
Total operating expenses		97,363		108,242		(10,879)	(10)	%
Gain on sale of real estate, net		13,408		—		13,408	*	%
Operating income (loss)		28,734		5,455		23,279	427	%
Other income and expense:
Interest income		45		1		44	4,400	%
Interest expense		(7,146)		(8,110)		(964)	(12)	%
Equity in earnings (loss) of unconsolidated entities		(274)		—		(274)	*	%
Income (loss) before taxes		21,359		(2,654)		24,013	905	%
Tax benefit (expense) of taxable REIT subsidiaries		(211)		2,402		(2,613)	(109)	%
Net income (loss)	$	21,148	$	(252)	$	21,400	8492	%

Revenues. Total revenues for the three months ended March 31, 2019 were $112.7 million compared to $113.7 million for the three months ended March 31, 2018. The decrease of $1.0 million, or 1%, was largely attributable to the 2018 strategic growth plan in which we transitioned a significant portion of our cloud and managed service offerings to a third party. Growth in our hyperscale and hybrid colocation offerings offset that decrease, primarily through increases in revenues in the Atlanta-Metro, Irving, Piscataway, Ashburn and Chicago data centers.

Property Operating Costs. Property operating costs for the three months ended March 31, 2019 were $34.1 million compared to property operating costs of $37.7 million for the three months ended March 31, 2018, a decrease of $3.6

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million, or 10%. The breakdown of our property operating costs is summarized in the table below (unaudited and in thousands):


	Three Months Ended March 31,
	2019		2018		$ Change		% Change
Property operating costs:
Direct payroll	$	5,727	$	5,764	$	(37)	(1)	%
Rent		3,170		3,612		(442)	(12)	%
Repairs and maintenance		2,811		4,126		(1,315)	(32)	%
Utilities		13,853		14,472		(619)	(4)	%
Management fee allocation		4,466		5,255		(789)	(15)	%
Other		4,076		4,511		(435)	(10)	%
Total property operating costs	$	34,103	$	37,740	$	(3,637)	(10)	%

The decrease in total property operating costs was attributable to aggregate expense reductions of $3.6 million primarily related to our transition from our cloud and managed services offerings associated with our strategic growth plan, with expense reductions primarily in repairs and maintenance, utilities and management fee allocation.

Real Estate Taxes and Insurance. Real estate taxes and insurance for the three months ended March 31, 2019 were $3.4 million compared to $2.9 million for the three months ended March 31, 2018. The increase of $0.5 million, or 16%, was primarily attributable to an increase in taxes at our Chicago and Irving facilities.

Depreciation and Amortization. Depreciation and amortization for the three months ended March 31, 2019 was $38.8 million compared to $35.9 million for the three months ended March 31, 2018. The increase of $2.9 million, or 8%, was primarily due to additional depreciation expense relating to an increase in assets placed in service at our Irving, Chicago, Atlanta-Metro and Ashburn facilities.

General and Administrative Expenses. General and administrative expenses were $19.9 million for the three months ended March 31, 2019 compared to general and administrative expenses of $22.2 for the three months ended March 31, 2018, a decrease of $2.3 million, or 11%. The decrease was primarily attributable to the implementation of the aforementioned strategic growth plan, resulting in a decrease in net payroll expenses.

Transaction and Integration Costs. Transaction and Integration Costs were $1.2 million for the three months ended March 31, 2019, compared to $0.9 million for the three months ended March 31, 2018. The increase of $0.3 million, or 32%, was primarily related to increased costs associated with assessment of actual and potential acquisitions during the three months ended March 31, 2019.

Restructuring Costs. Restructuring costs, which were costs associated with our strategic growth plan in the prior year, were $8.5 million for the three months ended March 31, 2018. Restructuring costs primarily related to employee severance expenses, professional fees, acceleration of equity-based compensation awards and the sale or write-off of certain product-related assets. No restructuring costs were incurred during the three months ended March 31, 2019.

Gain on sale of real estate, net. The gain on sale of real estate net incurred during the three months ended March 31, 2019 represents the net gain realized upon sale of the Manassas facility to the joint venture and represents the fair value of cash and noncash consideration received in the sale transaction, net of costs directly related to the sale in excess of the carrying amounts of the assets.

Interest Expense. Interest expense for the three months ended March 31, 2019 was $7.1 million compared to $8.1 million for the three months ended March 31, 2018. The decrease of $1.0 million, or 12%, was due primarily to a higher level of capitalized interest, partially offset by an increase in interest costs related to an increase in the average total debt balance of $78.1 million.

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Equity in earnings (loss) of unconsolidated entities. During the three months ended March 31, 2019, we entered into a joint venture agreement with respect to our Manassas data center. Equity in net loss from the inception of our investment through March 31, 2019 was $0.3 million, the only reporting period we had this entity.

Tax Expense/Benefit of Taxable REIT Subsidiaries. Tax expense of our taxable REIT subsidiaries for the three months ended March 31, 2019 was $0.2 million compared to a tax benefit of $2.4 million for the three months ended March 31, 2018. The current period tax expense primarily related to current state tax expense associated with recorded operating results, and valuation allowances recorded against certain federal and state deferred tax assets. The prior period tax benefit primarily related to recorded operating losses.

Non-GAAP Financial Measures

We consider the following non-GAAP financial measures to be useful to investors as key supplemental measures of our performance: (1) FFO; (2) Operating FFO; (3) Adjusted Operating FFO; (4) MRR; (5) NOI; (6) EBITDA re ; 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, EBITDA re and Adjusted EBITDA, as calculated by us, may not be comparable to FFO, Operating FFO, Adjusted Operating FFO, MRR, NOI, EBITDA re and Adjusted EBITDA as reported by other companies that do not use the same definition or implementation guidelines or interpret the standards differently from us.

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

FFO, Operating FFO and Adjusted Operating FFO

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

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

Adjusted Operating Funds From Operations (“Adjusted Operating FFO”) is a non-GAAP measure that is used as a supplemental operating measure and to provide additional information to users of the financial statements. We calculate Adjusted Operating FFO by adding or subtracting from Operating FFO items such as: maintenance capital investment,

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paid leasing commissions, amortization of deferred financing costs and bond discount, non-real estate depreciation and amortization, straight line rent adjustments, deferred taxes and non-cash compensation.

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

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


	Three Months Ended
	March 31,
	2019		2018
FFO
Net income (loss)	$	21,148	$	(252)
Equity in net (income) loss of unconsolidated entity		274		—
Real estate depreciation and amortization		35,927		32,057
Gain on sale of real estate, net		(13,408)		—
Pro rata share of FFO from unconsolidated entity		41		—
FFO (1)		43,982		31,805
Preferred stock dividends		(7,045)		(328)
FFO available to common stockholders & OP unit holders		36,937		31,477

Restructuring costs		—		8,530
Transaction and integration costs		1,214		920
Tax benefit associated with restructuring, transaction and integration costs		—		(1,635)
Operating FFO available to common stockholders & OP unit holders		38,151		39,292

Maintenance Capex		(709)		(930)
Leasing commissions paid		(6,515)		(5,910)
Amortization of deferred financing costs and bond discount		978		962
Non real estate depreciation and amortization		2,861		3,857
Straight line rent revenue and expense and other		(1,422)		(2,518)
Tax expense (benefit) from operating results		211		(767)
Equity-based compensation expense		3,300		3,481
Adjustments for unconsolidated entity		22		—
Adjusted Operating FFO available to common stockholders & OP unit holders	$	36,877	$	37,467

(1)

FFO for the three months ended March 31, 2018 includes $4.0 million of impairment losses related to certain non-real estate product related assets that were considered incidental to our primary business. No gains, losses or impairment write-downs associated with assets incidental to our primary business were incurred during the three months ended March 31, 2019.

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Monthly Recurring Revenue (MRR) and Recognized MRR

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

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

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

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


	Three Months Ended
	March 31,
	2019		2018
Recognized MRR in the period
Total period revenues (GAAP basis)	$	112,689	$	113,697
Less: Total period variable lease revenue from recoveries		(10,793)		(11,513)
Total period deferred setup fees		(3,232)		(2,893)
Total period straight line rent and other		(3,942)		(4,451)
Recognized MRR in the period	$	94,722	$	94,840

MRR at period end
Total period revenues (GAAP basis)	$	112,689	$	113,697
Less: Total revenues excluding last month		(73,809)		(75,661)
Total revenues for last month of period		38,880		38,036
Less: Last month variable lease revenue from recoveries		(3,871)		(3,107)
Last month deferred setup fees		(1,242)		(964)
Last month straight line rent and other		(2,068)		(2,051)
Add: Pro rata share of MRR at period end of unconsolidated entity		253		—
MRR at period end *	$	31,952	$	31,914

* Does not include our booked-not-billed MRR balance, which was $4.6 million and $4.7 million as of March 31, 2019 and 2018, 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) of taxable REIT subsidiaries, depreciation and amortization, write off of unamortized deferred financing, debt restructuring costs, gain (loss) on extinguishment of debt, transaction and

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integration costs, gain (loss) on sale of real estate, restructuring costs, general and administrative expenses and similar adjustments for unconsolidated entities. We allocate a management fee charge of 4% of cash revenues for all facilities (with the exception of the leased facilities acquired in 2015, which were allocated a charge of 10% of cash revenues) as a property operating cost and a corresponding reduction to general and administrative expense to cover the day-to-day administrative costs to operate our data centers. The management fee charge is reflected as a reduction to net operating income.

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

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


	Three Months Ended
	March 31,
	2019		2018
Net Operating Income (NOI)
Net income (loss)	$	21,148	$	(252)
Equity in net (income) loss of unconsolidated entity		274		—
Interest income		(45)		(1)
Interest expense		7,146		8,110
Depreciation and amortization		38,788		35,913
Tax expense (benefit) of taxable REIT subsidiaries		211		(2,402)
Transaction and integration costs		1,214		920
General and administrative expenses		19,891		22,234
Gain on sale of real estate, net		(13,408)		—
Restructuring		—		8,530
NOI from consolidated operations (1)	$	75,219	$	73,052
Pro rata share of NOI from unconsolidated entity		234		—
Total NOI (1)	$	75,453	$	73,052

(1)

Includes facility level general and administrative allocation charges of 4% of cash revenue for all facilities (with the exception of the leased facilities acquired in 2015, which were allocated a charge of 10% of cash revenues). These allocated charges aggregated to $4.5 million and $5.3 million for the three month periods ended March 31, 2019 and 2018, respectively.

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

We calculate EBITDA re in accordance with NAREIT. EBITDA re represents net income (loss) (computed in accordance with GAAP) adjusted to exclude gains (or losses) from sales of depreciated property, income tax expense (or benefit), interest expense, depreciation and amortization, impairments of depreciated property and unconsolidated entities, and similar adjustments for unconsolidated entities. Management uses EBITDA re 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 EBITDA re , which we refer to as Adjusted EBITDA. We generally calculate Adjusted EBITDA as EBITDA re 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 expenses associated with

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

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


	Three Months Ended
	March 31,
	2019		2018
EBITDA re and Adjusted EBITDA
Net income (loss)	$	21,148	$	(252)
Equity in net (income) loss of unconsolidated entity		274		—
Interest income		(45)		(1)
Interest expense		7,146		8,110
Tax expense (benefit) of taxable REIT subsidiaries		211		(2,402)
Depreciation and amortization		38,788		35,913
(Gain) loss on disposition of depreciated property and impairment write-downs of depreciated property		(13,408)		4,017
EBITDA re from unconsolidated entity		215		—
EBITDA re		54,329		45,385

Equity-based compensation expense		3,300		3,481
Restructuring costs		—		4,513
Transaction and integration costs		1,214		920
Adjusted EBITDA	$	58,843	$	54,299

Liquidity and Capital Resources

Short-Term Liquidity

Our short-term liquidity needs include funding capital expenditures for the development of data center space (a significant portion of which is discretionary), meeting debt service and debt maturity obligations, funding payments for finance leases, funding distributions to our stockholders and unit holders, utility costs, site maintenance costs, real estate and personal property taxes, insurance, rental expenses, general and administrative expenses and certain recurring and non-recurring capital expenditures.

In addition to the $101.2 million of capital expenditures incurred in the three months ended March 31, 2019 we expect that we will incur approximately $350 million to $400 million in additional capital expenditures through December 31, 2019, in connection with the development of our data center facilities, which excludes acquisitions and includes our 50% proportionate share of capital expenditures at the Manassas facility that was contributed to a joint venture. We expect to spend approximately $275 million to $325 million of capital expenditures with vendors on development, and the remainder on other capital expenditures and capitalized overhead costs (including capitalized interest, commissions, payroll and other similar costs), personal property and other less material capital projects. We expect to fund these costs using operating cash flows, draws on our credit facility, accessing forward equity net proceeds of approximately $148

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million, additional equity issuances or other capital markets activity. A significant portion of these expenditures are discretionary in nature and we may ultimately determine not to make these expenditures or the timing of such expenditures may vary.

We expect to meet our short-term liquidity needs through operating cash flow, cash and cash equivalents and borrowings under our credit facility in addition to accessing forward equity net proceeds of approximately $148 million. We may also transfer certain projects into unconsolidated entities as another source of capital.

Our cash paid for capital expenditures for the three months ended March 31, 2019 and 2018 are summarized in the table below (unaudited and in thousands):


	Three Months Ended March 31,
	2019		2018
Development	$	72,688	$	84,163
Acquisitions		—		24,626
Maintenance capital expenditures		709		930
Other capital expenditures (1)		27,837		18,843
Total capital expenditures	$	101,234	$	128,562

(1)

Represents capital expenditures for capitalized interest, commissions, personal property, overhead costs and corporate fixed assets. Corporate fixed assets primarily relate to construction of corporate offices, leasehold improvements and product related assets.

Long-Term Liquidity

Our long-term liquidity needs primarily consist of funds for property acquisitions, scheduled debt maturities, payment of principal at maturity of our Senior Notes, funding payments for finance leases, dividend payments on our Series A Preferred Stock and Series B Preferred Stock and recurring and non-recurring capital expenditures. We may also pursue new developments and additional redevelopment of our data centers and future redevelopment of other space in our portfolio. We may also pursue development on land which QTS currently owns that is available at our data center properties in Atlanta-Metro, Atlanta-Suwanee, Richmond, Irving, Fort Worth, Princeton, Chicago, Ashburn, Phoenix, Hillsboro and Manassas, through our new joint venture. The development and/or redevelopment of this space, including timing, is at our discretion and will depend on a number of factors, including availability of capital and our estimate of the demand for data center space in the applicable market. We expect to meet our long-term liquidity needs with net cash provided by operations, incurrence of additional long-term indebtedness, borrowings under our credit facility, access to joint venture capital and issuance of additional equity or debt securities, subject to prevailing market conditions, as discussed below.

Equity Capital

On March 15, 2018, we issued 4,280,000 shares of 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock with a liquidation preference of $25.00 per share, which included 280,000 shares of the underwriters’ partial exercise of their option to purchase additional shares. We used the net proceeds of approximately $103.2 million to repay amounts outstanding under our unsecured revolving credit facility.

On June 25, 2018, we issued 3,162,500 shares of 6.50% Series B Cumulative Convertible Perpetual Preferred Stock with a liquidation preference of $100.00 per share, which included 412,500 shares the underwriters purchased pursuant to the exercise of their overallotment option in full. We used the net proceeds of approximately $304 million to repay amounts outstanding under our unsecured revolving credit facility.

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shares of common stock) and receive proceeds of approximately $148 million from the sale of the 3,762,500 shares of common stock by March 1, 2020, although the Company has the right to elect settlement prior to that time.

Manassas Joint Venture

On February 22, 2019, we entered into a joint venture with Alinda Capital Partners (“Alinda”), a premier infrastructure investment firm, with respect to our Manassas data center, as described above under “Factors That May Influence Future Results of Operations and Cash Flows.” At the closing, we received approximately $53 million in proceeds, which was comprised of the cash contributed by Alinda and also borrowings under a $164.5 million secured credit facility entered into by the joint venture at closing that carries a rate of LIBOR plus 2.25%. We used these proceeds to pay down our revolving credit facility and for general corporate purposes. Under the joint venture agreement, we will receive additional proceeds in the future as and when we complete development of each phase of the Manassas data center and place it into service, which allows us to receive proceeds for Alinda’s share of the joint venture based on the expected full stabilization of the asset. These proceeds will be based on a 6.75% capitalization rate for each phase delivered during the first three years of the venture. We expect that upon full stabilization of the Manassas data center, we will have received approximately $87 million of proceeds from the joint venture (including the proceeds received at closing and which number is subject to reduction under certain circumstances), which will include proceeds from the joint venture’s credit facility. We further expect that this joint venture will reduce our expected capital deployment requirements for the development of the Manassas data center by approximately $120 million.

Cash

As of March 31, 2019, we had $18.7 million of unrestricted cash and cash equivalents.


Three Months Ended March 31, 2019
				Aggregate
		Per Share and		Dividend/Distribution
Record Date	Payment Date	Per Unit Rate		Amount (in millions)
Common Stock
December 21, 2018	January 8, 2019	$	0.41	$	23.7
				$	23.7

Series A Preferred Stock
December 31, 2018	January 15, 2019	$	0.45	$	1.9
				$	1.9

Series B Preferred Stock
December 31, 2018	January 15, 2019	$	1.63	$	5.1
				$	5.1


Three Months Ended March 31, 2018
				Aggregate
		Per Common Share and		Dividend/Distribution
Record Date	Payment Date	Per Unit Rate		Amount (in millions)
Common Stock
December 5, 2017	January 5, 2018	$	0.39	$	22.2
				$	22.2

Additionally, subsequent to March 31, 2019, the Company paid the following dividends:

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Indebtedness

As of March 31, 2019, we had approximately $1,284.0 million of indebtedness, including financing lease obligations.

Unsecured Credit Facility. In November 2018, we amended our amended and restated unsecured credit facility, by among other things extending the term, modifying or eliminating certain covenants and reduced pricing by 20 basis points. The unsecured credit facility includes a $350 million term loan which matures on December 17, 2023, a $350 million term loan which matures on April 27, 2024, and an $820 million revolving credit facility which matures on December 17, 2022, with a one year extension option. Amounts outstanding under the amended unsecured credit facility bear interest at a variable rate equal to, at our election, LIBOR or a base rate, plus a spread that will vary depending upon our leverage ratio. For revolving credit loans, the spread ranges from 1.35% to 1.95% for LIBOR loans and 0.35% to 0.95% for base rate loans. For term loans, the spread ranges from 1.30% to 1.90% for LIBOR loans and 0.30% to 0.90% for base rate loans. The unsecured credit facility also provides for borrowing capacity of up to $200 million in various foreign currencies, and a $500 million accordion feature, subject to obtaining additional loan commitments.

Under the unsecured credit facility, the capacity may be increased from the current capacity of $1.52 billion to $2.02 billion subject to certain conditions set forth in the credit agreement, including the consent of the administrative agent and obtaining necessary commitments. We are also required to pay a commitment fee to the lenders assessed on the unused portion of the unsecured revolving credit facility. At our election, we can prepay amounts outstanding under the unsecured credit facility, in whole or in part, without penalty or premium.

Our ability to borrow under the amended unsecured credit facility is subject to ongoing compliance with a number of customary affirmative and negative covenants, including limitations on liens, mergers, consolidations, investments, distributions, asset sales and affiliate transactions, as well as the following financial covenants: (i) the Operating Partnership's and its subsidiaries' consolidated total unsecured debt plus any capitalized lease obligations with respect to the unencumbered asset pool properties may not exceed 60% of the unencumbered asset pool value (or 65% of the unencumbered asset pool value for up to two consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the two fiscal quarter period includes the quarter in which the material acquisition was consummated); (ii) the unencumbered asset pool debt yield cannot be less than 12% (or 11.5% for the two consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the two fiscal quarter period includes the quarter in which the material acquisition was consummated); (iii) QTS must maintain a minimum fixed charge coverage ratio (defined as the ratio of consolidated EBITDA, subject to certain adjustments, to consolidated fixed charges) for the prior two most recently-ended calendar quarters of 1.50 to 1.00; (iv) QTS must maintain a maximum debt to gross asset value (as defined in the amended and restated agreement) ratio of 60% (or 65% for the two consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the two fiscal quarter period includes the quarter in which the material acquisition was consummated); and (v) QTS must maintain tangible net worth (as defined in the amended and restated agreement) cannot be less than the sum of $1,567,000,000 plus 75% of the net proceeds from any subsequent equity offerings.

The availability under the revolving credit facility is the lesser of (i) $820 million, (ii) 60% of the unencumbered asset pool capitalized value (or 65% of the unencumbered asset pool capitalized value for the two consecutive fiscal quarters

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immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the two fiscal quarter period includes the quarter in which the material acquisition was consummated) and (iii) the amount resulting in an unencumbered asset pool debt yield of 12% (or 11.5% for the two consecutive fiscal quarters immediately following a material acquisition for which the Operating Partnership has provided written notice to the Agent; provided the two fiscal quarter period includes the quarter in which the material acquisition was consummated). In the case of clauses (ii) and (iii) of the preceding sentence, the amount available under the revolving credit facility is adjusted to take into account any other unsecured debt and certain capitalized leases. A material acquisition is an acquisition of properties or assets with a gross purchase price equal to or in excess of 15% of the Operating Partnership’s gross asset value (as defined in the amended and restated agreement) as of the end of the most recently ended quarter for which financial statements are publicly available. The availability of funds under our unsecured credit facility depends on compliance with our covenants.

As of March 31, 2019, we had outstanding $835 million of indebtedness under the unsecured credit facility, consisting of $135.0 million of outstanding borrowings under our unsecured revolving credit facility and $700.0 million outstanding under the term loans, exclusive of net debt issuance costs of $6.1 million. In connection with the unsecured credit facility, as of March 31, 2019, we had additional letters of credit outstanding aggregating to $4.1 million. As of March 31, 2019, the weighted average interest rate for amounts outstanding under the unsecured credit facility, was 3.57%.

On April 5, 2017, we entered into forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from January 2, 2018 through December 17, 2021 and April 27, 2022, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing approximates 3.3%, which commenced on January 2, 2018 and assumes the current LIBOR spread of 1.3%.

On December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from December 17, 2021 and April 27, 2022 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the execution of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, we entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.

4.750% Senior Notes due 2025. On November 8, 2017, the Operating Partnership and QTS Finance Corporation, a subsidiary of the Operating Partnership formed solely for the purpose of facilitating the offering of the 5.875% Senior Notes due 2022 (collectively, the “Issuers”) issued $400 million aggregate principal amount of 4.75% Senior Notes due November 15, 2025 (the “Senior Notes”) in a private offering. The Senior Notes have an interest rate of 4.750% per annum and were issued at a price equal to 100% of their face value. The net proceeds from the offering were used to fund the redemption of, and satisfy and discharge the indenture pursuant to which the Issuers issued, the 5.875% Senior Notes due 2022 and to repay a portion of the amount outstanding under the Company’s unsecured revolving credit facility.

The Senior Notes are unconditionally guaranteed, jointly and severally, on a senior unsecured basis by all of the Operating Partnership’s existing subsidiaries (other than foreign subsidiaries and receivables entities) and future subsidiaries that guarantee any indebtedness of QTS, the Issuers or any other subsidiary guarantor. QTS Realty Trust, Inc. does not guarantee the Senior Notes and will not be required to guarantee the Senior Notes expect under certain circumstances. The offering was conducted pursuant to Rule 144A of the Securities Act of 1933, as amended, and the Senior Notes were issued pursuant to an indenture, dated as of November 8, 2017, among QTS, the Issuers, the

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guarantors named therein, and Deutsche Bank Trust Company Americas, as trustee (the “Indenture”). As of March 31, 2019, the outstanding net debt issuance costs associated with the Senior Notes were $5.1 million.

The Indenture contains affirmative and negative covenants that, among other things, limits or restricts the Operating Partnership’s ability and the ability of certain of its subsidiaries (the “Restricted Subsidiaries”) to: incur additional indebtedness; pay dividends; make certain investments or other restricted payments; enter into transactions with affiliates; enter into agreements limiting the ability of the Operating Partnership’s restricted subsidiaries to pay dividends; engage in sales of assets; and engage in mergers, consolidations or sales of substantially all of their assets.

However, certain of these covenants will be suspended if and for so long as the Senior Notes are rated investment grade by specified debt rating services and there is no default under the Indenture. The Operating Partnership and its Restricted Subsidiaries also are required to maintain total unencumbered assets (as defined in the Indenture) of at least 150% of their unsecured debt on a consolidated basis.

The Senior Notes may be redeemed by the Issuers, in whole or in part, at any time prior to November 15, 2020 at a redemption price equal to (i) 100% of the principal amount, plus (ii) accrued and unpaid interest to the redemption date, and (iii) a make-whole premium. On or after November 15, 2020, the Issuers may redeem the Senior Notes, in whole or in part, at a redemption price equal to (i) 103.563% of the principal amount from November 15, 2020 to November 14, 2021, (ii) 102.375% of the principal amount from November 15, 2021 to November 14, 2022, (iii) 101.188% of the principal amount from November 15, 2022 to November 14, 2023 and (iv) 100.000% of the principal amount of the Senior Notes from November 15, 2023 and thereafter, in each case plus accrued and unpaid interest to, but excluding, the redemption date. In addition, at any time prior to November 15, 2020, the Issuers may, subject to certain conditions, redeem up to 40% of the aggregate principal amount of the Senior Notes at 104.750% of the principal amount thereof, plus accrued and unpaid interest to, but excluding, the redemption date, with the net cash proceeds of certain equity offerings consummated by the Company or the Operating Partnership. Also, upon the occurrence of a change of control of us or the Operating Partnership, holders of the Senior Notes may require the Issuers to repurchase all or a portion of the Senior Notes at a price equal to 101% of the principal amount of the Senior Notes to be repurchased plus accrued and unpaid interest to the repurchase date.

Lenexa Mortgage. On March 8, 2017, we entered into a $1.9 million mortgage loan secured by our Lenexa facility. This mortgage has a fixed rate of 4.1%, with periodic principal payments due monthly and a balloon payment of $1.6 million in May 2022. As of March 31, 2019, the outstanding balance under the Lenexa mortgage was $1.8 million.

Contingencies

We are subject to various routine legal proceedings and other matters in the ordinary course of business. While resolution of these matters cannot be predicted with certainty, management believes, based upon information currently available, that the final outcome of these proceedings will not have a material adverse effect on our financial condition, liquidity or results of operations.

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Contractual Obligations

The following table summarizes our contractual obligations as of March 31, 2019, including the future non-cancellable minimum rental payments required under operating leases and the maturities and scheduled principal repayments of indebtedness and other agreements (unaudited and in thousands):


Obligations	2019		2020		2021		2022		2023		Thereafter		Total
Operating Leases	$	7,165	$	9,648	$	9,877	$	10,327	$	10,454	$	58,111	$	105,582
Finance Leases		2,056		2,579		2,713		2,958		3,229		33,661		47,196
Future Principal Payments of Indebtedness (1)		52		71		74		136,594		350,000		750,000		1,236,791
Total (2)	$	9,273	$	12,298	$	12,664	$	149,879	$	363,683	$	841,772	$	1,389,569

(1)

Does not include the related debt issuance costs on Senior Notes nor the related debt issuance costs on the term loans reflected at March 31, 2019. Also does not include letters of credit outstanding aggregating to $4.1 million as of March 31, 2019 under our unsecured credit facility.

(2)

Total obligations does not include contractual interest that we are required to pay on our long-term debt obligations. Contractual interest payments on our credit facilities, mortgages, finance leases, and other financing arrangements through the scheduled maturity date, assuming no prepayment of debt and inclusive of the effects of interest rate swaps, are shown below. Interest payments were estimated based on the principal amount of debt outstanding and the applicable interest rate as of March 31, 2019 (unaudited and in thousands):


2019		2020		2021		2022		2023		Thereafter		Total
$	43,956	$	52,477	$	52,412	$	53,963	$	47,275	$	47,421	$	297,504

Off-Balance Sheet Arrangements

As of March 31, 2019, our pro rata share of mortgage debt of the joint venture was approximately $27.3 million, all of which is subject to forward interest rate swap agreements. See Item 3, Quantitative and Qualitative Disclosures About Market Risk, for additional information on our interest rate swaps.

Cash Flows

Cash flow for the three months ended March 31, 2019 compared to the three months ended March 31, 2018 are summarized below (unaudited and in thousands):


	Three Months Ended
	March 31,
	2019		2018
Cash flow provided by (used for):
Operating activities	$	44,168	$	51,553
Investing activities		(48,512)		(128,562)
Financing activities		11,263		84,687

Three Months Ended March 31, 2019 Compared to Three Months Ended March 31, 2018

Cash flow provided by operating activities was $44.2 million for the three months ended March 31, 2019 compared to $51.6 million for the three months ended March 31, 2018. There was an increase in cash operating income of $5.8 million from the prior period primarily related to our expansion and leasing activity, offset by a decrease in cash flow associated with net changes in working capital of $13.2 million primarily related to changes in accounts payable and accrued liabilities.

Cash flow used for investing activities decreased by $80.1 million to $48.5 million for the three months ended March 31, 2019, compared to $128.6 million for the three months ended March 31, 2018. The decrease was due primarily to cash proceeds of $52.7 million received from the Company’s contribution of assets to a joint venture during the current period as well as a decrease in cash paid for acquisitions of $24.6 million.

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Cash flow provided by financing activities was $11.3 million for the three months ended March 31, 2019, compared to $84.7 million for the three months ended March 31, 2018. The decrease was primarily due to lower net proceeds of $124 million under our unsecured credit facility, primarily a result of the payoff of a portion of the revolving credit facility using proceeds from issuance of common stock during the three months ended March 31, 2019, as well as higher payments of cash dividends to common and preferred stockholders of $8.3 million. Offsetting these decreases was in increase in net equity proceeds of $55.7 million.

Critical Accounting Policies

The Company applies those accounting policies that management believes best reflect the underlying business and economic events, consistent with accounting principles generally accepted in the United States. Inherent in such policies are certain key assumptions and estimates made by management. Management periodically updates its estimates used in the preparation of the consolidated financial statements based on its latest assessment of the current and projected business and general economic environment.

Effective January 1, 2019, the Company adopted ASC Topic 842, Leases , which resulted in changes to the Company’s critical accounting policy relating to accounting for lease transactions. Refer to Note 2 – ‘Summary of Significant Accounting Policies’ for additional information regarding the new and updated policies as a result of the adoption of ASC Topic 842.

Additional information regarding the Company’s Critical Accounting Policies and Estimates is included in Item 7 of the Company’s Annual Report on Form 10-K for the year ended December 31, 201 8 .

Inflation

Substantially all of our long-term leases - leases with a term greater than three years - contain rent increases and reimbursement for certain operating costs. As a result, we believe that we are largely insulated from the effects of inflation over periods greater than three years. Leases with terms of three years or less will be replaced or renegotiated within three years and should adjust to reflect changed conditions, also mitigating the effects of inflation. Moreover, to the extent that there are material increases in utility costs, we generally reserve the right to renegotiate the rate. However, any increases in the costs of redevelopment of our properties will generally result in a higher cost of the property, which will result in increased cash requirements to redevelop our properties and increased depreciation and amortization expense in future periods, and, in some circumstances, we may not be able to directly pass along the increase in these redevelopment costs to our customers in the form of higher rental rates.

Distribution Policy

To satisfy the requirements to qualify as a REIT, and to avoid paying tax on our income, QTS intends to continue to make regular quarterly distributions of all, or substantially all, of its REIT taxable income (excluding net capital gains) to its stockholders.

All distributions will be made at the discretion of our board of directors and will depend on our historical and projected results of operations, liquidity and financial condition, QTS’ REIT qualification, our debt service requirements, operating expenses and capital expenditures, prohibitions and other restrictions under financing arrangements and applicable law and other factors as our board of directors may deem relevant from time to time. We anticipate that our estimated cash available for distribution will exceed the annual distribution requirements applicable to REITs and the amount necessary to avoid the payment of tax on undistributed income. However, under some circumstances, we may be required to make distributions in excess of cash available for distribution in order to meet these distribution requirements and we may need to borrow funds to make certain distributions. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available for distribution from what they otherwise would have been.

The Operating Partnership also includes certain partners that are subject to a taxable income allocation, however, not entitled to receive recurring distributions. The partnership agreement does stipulate however, to the extent that taxable

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income is allocated to these partners that the partnership will make a distribution to these partners equal to the lesser of the actual per unit distributions made to Class A partners or an estimated amount to cover federal, state and local taxes on the allocated taxable income. No distributions related to allocated taxable income were made to these partners for the three months ended March 31, 2019 and 2018.

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ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our future income, cash flows and fair values relevant to financial instruments are dependent upon prevailing market interest rates. Market risk refers to the risk of loss from adverse changes in market prices and interest rates. The primary market risk to which we believe we are exposed is interest rate risk. Many factors, including governmental monetary and tax policies, domestic and international economic and political considerations and other factors that are beyond our control, contribute to interest rate risk.

As of March 31, 2019, after consideration of interest rate swaps in effect, we had outstanding $435 million of consolidated indebtedness that bore interest at variable rates which does not take into account $400 million of swaps that take effect December 17, 2021 and April 27, 2022, and the $200 million of swaps that take effect on January 2, 2020, each as discussed below.

We monitor our market risk exposures using a sensitivity analysis. Our sensitivity analysis estimates the exposure to market risk sensitive instruments assuming a hypothetical 1% change in year-end interest rates. A 1% increase in the LIBOR rate would increase the interest expense on the $435 million of variable indebtedness outstanding as of March 31, 2019 by approximately $4.4 million annually. Conversely, a decrease in the LIBOR rate to 1.49% would decrease the interest expense on this $435 million of variable indebtedness outstanding by approximately $4.4 million annually based on the one month LIBOR rate of approximately 2.49% as of March 31, 2019.

In addition, on December 20, 2018, we entered into additional forward interest rate swap agreements with an aggregate notional amount of $400 million. The forward swap agreements effectively fix the interest rate on $400 million of term loan borrowings, $200 million of swaps allocated to each term loan, from December 17, 2021 and April 27, 2022 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $400 million notional amount of term loan financing following the commencement of these swap agreements will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022, assuming the current LIBOR spread of 1.3%. Additionally, the Company entered into forward interest rate swap agreements with an aggregate notional amount of $200 million. The forward swap agreements effectively fix the interest rate on $200 million of additional term loan borrowings, $100 million of swaps allocated to each term loan, from January 2, 2020 through the current maturity dates of the respective term loans which are December 17, 2023 and April 27, 2024, respectively. The weighted average effective fixed interest rate on the $200 million notional amount of term loan financing, following the execution of these swap agreements, will approximate 3.9%, commencing on January 2, 2020, assuming the current LIBOR spread of 1.3%.

The above analyses do not consider the effect of any change in overall economic activity that could impact interest rates or expected changes associated with future indebtedness. Further, in the event of a change of that magnitude, we may take actions to further mitigate our exposure to the change. However, due to the uncertainty of the specific actions that would be taken and their possible effects, these analyses assume no changes in our financial structure.

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ITEM 4. Controls and Procedure s

QTS Realty Trust, Inc.

Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures for the period ended March 31, 2019, conducted by the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer concluded that QTS’ disclosure controls and procedures are effective to ensure that information required to be disclosed by QTS in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in QTS’ internal control over financial reporting during the period ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, QTS’ internal control over financial reporting.

QualityTech, LP

Disclosure Controls and Procedures

Based on an evaluation of disclosure controls and procedures for the period ended March 31, 2019, conducted by the Company’s management, with the participation of the Chief Executive Officer and Chief Financial Officer, the Chief Executive Officer and Chief Financial Officer concluded that the Operating Partnership’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Operating Partnership in reports that it files or submits under the Securities Exchange Act of 1934 is accumulated and communicated to the Company’s management (including the Chief Executive Officer and Chief Financial Officer) to allow timely decisions regarding required disclosure, and is recorded, processed, summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Changes in Internal Control over Financial Reporting

There were no changes in the Operating Partnership’s internal control over financial reporting during the period ended March 31, 2019, that have materially affected, or are reasonably likely to materially affect, the Operating Partnership’s internal control over financial reporting.

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PART II. OTHER INFORMATION

ITEM 1. Legal Proceedings

In the ordinary course of our business, we are subject to claims and administrative proceedings, none of which we believe are material or would be expected to have, individually or in the aggregate, a material adverse effect on us.

ITEM 1A. Risk Factor s

There have been no material changes to the risk factors disclosed in our Form 10-K for the year ended December 31, 2018, filed with the Securities and Exchange Commission (“SEC”) on February 25, 2019, which are accessible on the SEC’s website at www.sec.gov.

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

Unregistered Sales of Equity Securities

QTS did not sell any securities during the three months ended March 31, 2019 that were not registered under the Securities Act of 1933, as amended (the “Securities Act”).

QTS from time to time issues shares of Class A common stock (i) upon exercise of stock options issued under the QTS Realty Trust, Inc. 2013 Equity Incentive Plan and (ii) upon redemption of Class A units of limited partnership of the Operating Partnership (either through Class A units previously held or those received from conversion of Class O units from the QualityTech, LP 2010 Equity Incentive Plan). Pursuant to the partnership agreement of the Operating Partnership, each time QTS issues shares of common stock, the Operating Partnership issues to QTS, its general partner, an equal number of Class A units, which are redeemable for cash or Class A common stock on a one-for-one basis. The units issued to QTS are not registered under the Securities Act in reliance on Section 4(a)(2) of the Securities Act due to the fact that Class A units are issued only to QTS and therefore, do not involve a public offering. In addition, during the three months ended March 31, 2019, the Operating Partnership issued approximately 97,000 Class A units in connection with the issuance of Class A common stock upon exercise of stock options issued by QTS.

In addition, on March 1, 2019, the Operating Partnership issued 4,000,000 Class A units to QTS in connection with QTS’s underwritten offering of 7,762,500 shares of Class A common stock, consisting of 4,000,000 shares issued by QTS on March 1, 2019 and 3,762,500 shares which will be issued on a forward basis prior to March 1, 2020 (and in connection with which 3,762,500 Class A units will be issued to QTS). These units issued to QTS were not registered under the Securities Act in reliance on Section 4(a)(2) of the Securities Act due to the fact that Class A units were issued only to QTS and therefore, did not involve a public offering.

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Repurchases of Equity Securities

During the three months ended March 31, 2019, certain of our employees surrendered Class A common stock owned by them to satisfy their federal and state tax obligations in connection with the vesting of restricted common stock under the 2013 Equity Incentive Plan.

The following table summarizes all of these repurchases during the three months ended March 31, 2019:


				Total number of
				shares purchased as	Maximum number of
	Total number	Average price		part of publicly	shares that may yet be
	of shares	paid per		announced plans or	purchased under the
Period	purchased (1)	share		programs	plans or programs
January 1, 2019 through January 31, 2019	639	$	37.05	N/A	N/A
February 1, 2019 through February 28, 2019	2,926		42.11	N/A	N/A
March 1, 2019 through March 31, 2019	45,132		42.43	N/A	N/A
Total	48,697	$	42.34

(1)

The number of shares purchased represents shares of Class A common stock surrendered by certain of our employees to satisfy their federal and state tax obligations associated with the vesting of restricted common stock. With respect to these shares, the price paid per share is based on the closing price of our Class A common stock as of the date of the determination of the federal income tax.

ITEM 3. Defaults Upon Senior Securities

None.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

None.

ITEM 6. Exhibit s


Exhibit Number		Exhibit Description

2.1		Stock Purchase Agreement dated May 6, 2016 by and among Quality Technology Services Holding, LLC, Carpathia Holdings, LLC and Carpathia Acquisition, Inc., incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on May 12, 2015 (Commission File No. 002-36109)

2.2		First Amendment to Stock Purchase Agreement dated June 12, 2015, incorporated by reference to Exhibit 2.1 to the Current Report on Form 8-K filed with the SEC on June 19, 2015 (Commission File No. 001-36109)

3.1		Articles of Amendment and Restatement of QTS Realty Trust, Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on October 17, 2013 (Commission File No. 001-36109)

3.2		Second Amended and Restated Bylaws of QTS Realty Trust, Inc., incorporated by reference to Exhibit 3.2 to the Quarterly Report on Form 10-Q filed with the SEC on May 8, 2017 (Commission File No. 001-36109)

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3.3		Articles Supplementary designating QTS Realty Trust, Inc.’s 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock, liquidation preference $25.00 per share, $0.01 par value per share, incorporated by reference to Exhibit 3.2 to the Company’s Form 8-A filed on March 15, 2018 (Commission File No. 001-36109)

3.4		Articles Supplementary designating QTS Realty Trust, Inc.’s 6.50% Series B Cumulative Convertible Perpetual Preferred Stock, liquidation preference $100.00 per share, $0.01 par value per share, incorporated by reference to Exhibit 3.3 to the Company’s Form 8-A filed on June 25, 2018 (Commission File No. 001-36109)

3.5		Articles Supplementary opting out of the Maryland Unsolicited Takeovers Act, incorporated by reference to Exhibit 3.1 to the Company’s Form 8-K filed on September 25, 2018 (Commission File No. 001-36109)

3.6		Articles of Amendment to the Articles of Amendment and Restatement of QTS Realty Trust, Inc., incorporated by reference to Exhibit 3.1 to the Current Report on Form 8-K filed with the SEC on May 10, 2019 (Commission File No. 002-36109)

4.1		Form of Specimen Class A Common Stock Certificate, incorporated by reference to Exhibit 4.1 to the Registration Statement on Form S-11/A filed with the SEC on September 26, 2013 (Commission File No. 333-190675)

4.2		Indenture, dated November 8, 2017, by and among QualityTech, LP, QTS Finance Corporation, QTS Realty Trust, Inc., certain subsidiaries of QualityTech, LP and Deutsche Bank Trust Company Americas, incorporated by reference to Exhibit 4.1 to the Current Report on Form 8-K filed with the SEC on November 8, 2017 (Commission File No. 001-36109)

4.3		Form of 4.750% Senior Notes due 2025 (included as Exhibit A to Exhibit 4.2 hereof)

4.4		Supplemental Indenture, dated as of December 22, 2017, by and among QualityTech, LP, QTS Finance Corporation, QTS Realty Trust, Inc., the entities identified therein as Guaranteeing Subsidiaries, the entities identified therein as Subsidiary Guarantors, and Deutsche Bank Trust Company Americas, to the Indenture dated, as of November 8, 2017, by and among QualityTech, LP, and QTS Finance Corporation, as issuers, QTS Realty Trust, Inc., each of the subsidiary guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, incorporated by reference to Exhibit 4.4 to the Annual Report on Form 10-K filed with the SEC on February 28, 2018 (Commission File No. 001-36109)

4.5		Form of stock certificate evidencing the 7.125% Series A Cumulative Redeemable Perpetual Preferred Stock, liquidation preference $25.00 per share, $0.01 par value per share, incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A filed on March 15, 2018 (Commission File No. 001-36109)

4.6		Form of stock certificate evidencing the 6.50% Series B Cumulative Convertible Perpetual Preferred Stock, liquidation preference $100.00 per share, $0.01 par value per share, incorporated by reference to Exhibit 4.1 to the Company’s Form 8-A filed on June 25, 2018 (Commission File No. 001-36109)

4.7		Supplemental Indenture dated as of December 31, 2018 among West Midtown Acquisition Company, LLC, QualityTech, LP, QTS Finance Corporation, QTS Realty Trust, Inc., the Subsidiary Guarantors (as such term is defined in the Indenture), and Deutsche Bank Trust Company Americas, as trustee, to the Indenture dated, as of November 8, 2017, by and among QualityTech, LP, and QTS Finance Corporation, as issuers, QTS Realty Trust, Inc., each of the subsidiary guarantors party thereto, and Deutsche Bank Trust Company Americas, as trustee, (the “Indenture”) as amended by the Supplemental Indenture, dated as of December 22, 2017, by and among QualityTech, LP, QTS Finance Corporation, QTS Realty Trust, Inc., the entities identified therein as Guaranteeing Subsidiaries, the entities identified therein as Subsidiary Guarantors, and Deutsche Bank Trust Company Americas, incorporated by reference to Exhibit 4.7 to the Company’s Form 10-K filed on February 25, 2019 (Commission File No. 001-36109)

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10.1		Indemnification Agreement, dated as of March 13, 2019, by and between QTS Realty Trust, Inc. and Wayne Rehberger, incorporated by reference to Exhibit 10.1 to the Current Report on Form 8-K filed with the SEC on March 13, 2019 (Commission File No. 001-36109)

10.2		Form of Performance Share Unit Agreement (Performance-Based FFO Units) under QTS Realty Trust, Inc. 2013 Equity Incentive Plan

10.3		Form of Performance Share Unit Agreement (Performance-Based FFO Units) for Grants to Chief Executive Officer under QTS Realty Trust, Inc. 2013 Equity Incentive Plan

10.4		Form of Performance Share Unit Agreement (Performance-Based Relative TSR Units) under QTS Realty Trust, Inc. 2013 Equity Incentive Plan

10.5		Form of Performance Share Unit Agreement (Performance-Based Relative TSR Units) for Grants to Chief Executive Officer under QTS Realty Trust, Inc. 2013 Equity Incentive Plan

10.6		First Amendment to Sixth Amended and Restated Credit Agreement, dated as of March 29, 2019, by and among QualityTech, LP, QTS Realty Trust, Inc., the entities identified therein as Subsidiary Guarantors, KeyBank National Association, the lenders parties thereto, and KeyBank National Association, as agent

31.1		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (QTS Realty Trust, Inc.)

31.2		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (QTS Realty Trust, Inc.)

31.3		Certification of Chief Executive Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (QualityTech, LP)

31.4		Certification of Chief Financial Officer pursuant to Rule 13a-14(a)/15d-14(a) of the Securities Exchange Act of 1934, as amended, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002 (QualityTech, LP)

32.1		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (QTS Realty Trust, Inc.)

32.2		Certification of Chief Executive Officer and Chief Financial Officer pursuant to 18 U.S.C. 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 (QualityTech, LP)

101		The following materials from QTS Realty Trust, Inc.’s and QualityTech, LP’s Quarterly Report on Form 10-Q for the period ended March 31, 2019, formatted in XBRL (eXtensible Business Reporting Language): (i) condensed consolidated balance sheets, (ii) condensed consolidated statements of operations and comprehensive income (loss), (iii) condensed consolidated statements of equity and partners’ capital, (iv) condensed consolidated statements of cash flow, and (v) the notes to the condensed consolidated financial statements

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SIGNATURE S

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.


	QTS Realty Trust, Inc.

DATE: May 10, 2019	/s/ Chad L. Williams
	Chad L. Williams
	Chairman and Chief Executive Officer


DATE: May 10, 2019	/s/ William H. Schafer
	William H. Schafer
	Executive Vice President – Finance and Accounting
	(Principal Accounting Officer)


DATE: May 10, 2019	/s/ Jeffrey H. Berson
	Jeffrey H. Berson
	Chief Financial Officer
	(Principal Financial Officer)

	QualityTech, LP

	By: QTS Realty Trust, Inc.,
	its general partner


DATE: May 10, 2019	/s/ Chad L. Williams
	Chad L. Williams
	Chairman and Chief Executive Officer


DATE: May 10, 2019	/s/ William H. Schafer
	William H. Schafer
	Executive Vice President – Finance and Accounting
	(Principal Accounting Officer)


DATE: May 10, 2019	/s/ Jeffrey H. Berson
	Jeffrey H. Berson
	Chief Financial Officer
	(Principal Financial Officer)

Exhibit 10.2

QTS REALTY TRUST, INC.

2013 EQUITY INCENTIVE PLAN

PERFORMANCE SHARE UNIT AGREEMENT

(Performance-Based FFO Units)

Performance Share Units		This Agreement evidences an award of PSUs in the Target Number set forth on the cover sheet and subject to the terms and conditions set forth in the Agreement and in the Plan.
The Plan		The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition, non-solicitation and/or severance agreement between you and the Company or any Affiliate shall supersede this Agreement with respect to its subject matter, unless explicitly superseded by this Agreement.
Transfer of Performance Share Units		The PSUs may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the PSUs be made subject to execution, attachment or similar process. If you attempt to do any of these things, the PSUs will immediately become forfeited.
Vesting		The PSUs shall become earned and vested in accordance with Exhibit A .
Certain Terminations		Notwithstanding the terms of any employment agreement between you and the Company or an Affiliate that addresses the treatment of equity awards upon a termination of employment, in the event of your Involuntary Termination prior to the Certification Date , you shall remain eligible to earn a pro rata portion of the number of PSUs that become earned in accordance with Exhibit A , and such number of PSUs that becomes earned shall fully vest as of the Certification Date (as defined in Exhibit A ). The prorata portion described in the preceding sentence shall be equal to a fraction, (i) the numerator of which equals the number of days elapsed in the Performance Period through the date of your Involuntary Termination, and (ii) the denominator of which equals the total number of days in the

Performance Period. In the event of your Involuntary Termination following the Certification Date but prior to the third anniversary of the Grant Date, all remaining unvested PSUs shall become fully vested on the date of such Involuntary Termination.

For purposes of this section, “ Involuntary Termination ” means termination of your Service by reason of (i) your death; (ii) your Disability; (iii) your involuntary dismissal by the Company or its successor for reasons other than Cause; or (iv) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then following (x) a substantial adverse alteration in your title or responsibilities; (y) a reduction in your annual base salary or a material reduction in your annual target bonus opportunity; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof); provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice.

Change in Control

Notwithstanding any provision of the Plan to the contrary, upon the consummation of a Change in Control prior to December 31, 2020, in which the PSUs are assumed, or restricted securities of equivalent value are substituted for the PSUs, by the Company or its successor, the PSUs shall cease to be subject to the performance conditions set forth in Exhibit A , and two-thirds of the Target Number of PSUs will become vested as of December 31, 2020, and one-third of the Target Number of PSUs will become vested on the third anniversary of the Grant Date, subject to your continued Service through each vesting date; provided that, in the event of your Involuntary Termination within the 12-month period following the consummation of the Change in Control, all remaining unvested shares shall become fully vested. If the PSUs are not assumed or substituted for in connection with any Change in Control, you will become immediately vested in 100% of the Target Number of PSUs, notwithstanding any provision of the Plan to the contrary.

		or severance agreement, plan, or arrangement between you and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in your title or responsibilities from those in effect immediately prior to the Change in Control; (y) a reduction in your annual base salary as of immediately prior to the Change in Control (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Change in Control; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Change in Control or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with your business travel obligations as of immediately prior to the Change in Control; provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice .
Forfeiture of Unvested Performance Share Units		Unless the termination of your Service triggers accelerated vesting of your PSUs or other treatment pursuant to the terms of this Agreement or the Plan, you will automatically forfeit to the Company all of the PSUs that have not vested in the event you have a Separation from Service. Effective as of the Certification Date (as defined in Exhibit A) , you will forfeit to the Company all of the PSUs that do not become earned under the Award, as determined by the Committee.
Delivery		Delivery of the Shares represented by your vested PSUs shall be made within 30 days of the applicable vesting date set forth in Exhibit A , or, if earlier, your Separation from Service resulting in your immediate vesting of PSUs.
Forfeiture of Rights		If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of any the Company or any Affiliate or any confidentiality obligation with respect to the Company or any Affiliate or otherwise in competition with the Company or any Affiliate, the Company has the right to cause an immediate forfeiture of your rights to the PSUs awarded under this Agreement and the PSUs shall immediately expire. In addition, if you have vested in PSUs during the three year period prior to your actions, you will owe the Company a cash payment (or

		forfeiture of Shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the Performance Shares or any other Shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence		For purposes of this Agreement, you do not have a Separation from Service when you go on a bona fide leave of absence that was approved by your employer in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. You will have a Separation from Service in any event when the approved leave ends unless you immediately return to active employee work. Your employer may determine, in its discretion, which leaves count for this purpose, and when you have a Separation from Service for all purposes under the Plan in accordance with the provisions of the Plan. Notwithstanding the foregoing, the Company may determine, in its discretion, that a leave counts for this purpose even if your employer does not agree.
Withholding Taxes		You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting of the PSUs. In the event that the Company or any Affiliate determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the PSUs arising from this grant, the Company or any Affiliate shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested Shares otherwise deliverable under this Agreement).
Retention Rights		This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company or any Affiliate in any capacity. Unless otherwise specified in an employment or other written agreement between the Company or any Affiliate and you, the Company or any Affiliate reserves the right to terminate your Service at any time and for any reason.

Shareholder Rights and Dividend Equivalent Rights

You have no rights as a shareholder of the Company (including, without limitation, the right to receive quarterly or special dividends) with respect to the PSUs unless and until a certificate for the Shares relating to the vested PSUs has been issued to you (or an appropriate book entry has been made).

Notwithstanding the foregoing, the Company grants you a Dividend Equivalent Right relating to each PSU which vests, if any, pursuant to this Agreement or the Plan. If the Company declares a cash dividend on the Company’s outstanding Shares prior to the date the PSUs vest in accordance with Exhibit A , the amount of the cash dividend per Share declared prior to such vesting date shall be deemed to be reinvested in additional Shares. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Your Dividend Equivalent Right will be settled in a number of Shares equal to the number of PSUs which vest pursuant to this Agreement, multiplied by the number of additional Shares determined in accordance with the preceding sentence. Delivery of the Shares representing your Dividend Equivalent Right shall occur concurrently with the delivery of the Shares represented by your vested PSUs.

Clawback

This Award is subject to mandatory repayment by you to the Company to the extent you are or in the future become subject to any Company “clawback” or recoupment policy that requires the repayment by you to the Company of compensation paid by the Company to you in the event that you fail to comply with, or violate, the terms or requirements of such policy.

If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws and you knowingly engaged in the misconduct, were grossly negligent in engaging in the misconduct, knowingly failed to prevent the misconduct or were grossly negligent in failing to prevent the misconduct, you shall reimburse the Company the amount of any payment in settlement of this Award earned or accrued during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document that contained such material noncompliance.


		Shares on the date of delivery if you no longer hold the Shares) if pursuant to the terms of this Agreement, the amount of the Award earned or the vesting in the Award was explicitly based on the achievement of pre-established performance goals set forth in this Agreement (including earnings, gains, or other criteria) that are later determined, as a result of the accounting restatement, not to have been achieved.
Applicable Law		This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy		In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By accepting this grant, you give explicit consent to the Company to process any such personal data.
Purchase Price		If a purchase price is required by Applicable Law, it shall be deemed paid by your prior or future Service.
Electronic Delivery		The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, please contact Shirley Goza at shirley.goza@qtsdatacenter.com or 913-312-5503 to request paper copies of these documents.
Code Section 409A		For purposes of this Agreement, you shall have a “Separation from Service” when the Company reasonably anticipates that your level of Service will permanently decrease to no more than 20 percent of the average level of Service you have performed over the immediately preceding 36-month period (or such lesser period of your Service with the Company and its Affiliates), which shall be interpreted consistently with the provisions of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”). It is intended that the Agreement comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Agreement will be interpreted and administered to be in

compliance with Section 409A. To the extent that the Company determines that you would be subject to the additional taxes or penalties imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional taxes or penalties. The nature of any such amendment shall be determined by the Company. Notwithstanding anything to the contrary in this Agreement or the Plan, to the extent required to avoid accelerated taxation and penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Agreement during the six-month period immediately following your Separation from Service will instead be paid on the first payroll date after the six-month anniversary of your Separation from Service (or your death, if earlier). Each installment of PSUs that vests under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Section 409A.

By signing this Agreement, you agree to all of the terms and conditions described above and in the Plan.

EXHIBIT A

The number of PSUs that may be earned under the Award (“ Earned PSUs ”) shall be based on based on the Company’s Run-Rate over the Performance Period, determined as follows:

Run-Rate for the Performance Period	Earned PSUs
$3.20	200% of the Target Number of PSUs
$3.00	100% of the Target Number of PSUs
$2.85	50% of the Target Number of PSUs
< $2.85	0% of the Target Number of PSUs

If the Run Rate for the Performance Period is less than $ 2.85 , none of the Target Number of PSUs shall be earned for the Performance Period.

If the Company’s Run Rate for the Performance Period equals $3.00 , then 100% of the Target Number of PSUs shall become Earned PSUs.

To the extent that the Run Rate of the Company is greater than $2.85 and less than $3.00, then a number of PSUs between 50% and 100% of the Target Number of PSUs will become Earned PSUs, determined by linear interpolation.

To the extent that the Run Rate of the Company is greater than $3.00 and less than $3.20, then a number of PSUs between 100% and 200% of the Target Number of PSUs will become Earned PSUs, determined by linear interpolation.

In no event shall more than 200% of the Target Number of PSUs set forth on the cover sheet become Earned PSUs under this Agreement.

To the extent the Committee certifies a positive number of Earned PSUs, then the Earned PSUs shall vest: (a) as to two-thirds of the Earned PSUs, on the Certification Date, and (b) as to one-third of the Earned PSUs, on the third anniversary of the Grant Date, subject to your continued Service through each applicable vesting date.

For purposes of this Exhibit A :

“ Performance Period ” shall mean the period commencing on January 1, 2019 and ending on December 31, 2020.

“ Run-Rate ” shall mean ‘Operating Funds From Operations available to common shareholders and OP unit holders per diluted share’, as reported in the Company’s financial statements in its Supplemental Information to the Earnings Report, for the fourth fiscal quarter (Three Months Ended) ending December 31, 2020, multiplied by 4; provided, however, the Committee shall have discretion to make appropriate adjustments for extraordinary items .

Exhibit 10.3

Form exclusively for grants to Chad Williams

QTS REALTY TRUST, INC.

2013 EQUITY INCENTIVE PLAN

PERFORMANCE SHARE UNIT AGREEMENT

(Performance-Based FFO Units)

Performance Share Units		This Agreement evidences an award of PSUs in the Target Number set forth on the cover sheet and subject to the terms and conditions set forth in this Agreement and in the Plan (the “Award”).
The Plan		The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition, non-solicitation and/or severance agreement between you and the Company or any Affiliate shall supersede this Agreement with respect to its subject matter, provided, however, that by your acceptance of this grant of PSUs, you acknowledge and agree that, in the event of your Involuntary Termination, all references in your employment agreement to awards “fully vesting” or “vesting in full” or similar terms shall mean vesting at the Target number of PSUs set forth on the cover sheet unless such Involuntary Termination is at or following the end of the Performance Period (as defined in Exhibit A ), in which case all references to awards “fully vesting” or “vesting in full” shall mean that the number of remaining unvested Earned PSUs shall vest in full.
Transfer of Performance Share Units		The PSUs may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the PSUs be made subject to execution, attachment or similar process. If you attempt to do any of these things, the PSUs will immediately become forfeited.
Vesting		The PSUs shall become earned and vested in accordance with Exhibit A .
Certain Terminations		In the event of your Involuntary Termination prior to the end of the Performance Period , you shall vest in the Target number of PSUs set forth on the cover sheet, and no requirement to remain in continuous Service shall apply following such Involuntary Termination. In the

Form exclusively for grants to Chad Williams

event of your Involuntary Termination at or following the end of the Performance Period but prior to the third anniversary of the Grant Date, you shall become fully vested in all remaining unvested Earned PSUs.

For purposes of this section, “ Involuntary Termination ” means termination of your Service by reason of (i) your death; (ii) your Disability, as defined in any applicable employment agreement or, if none, then as defined in the Plan; (iii) your involuntary dismissal by the Company or its successor for reasons other than Cause as defined in any applicable employment agreement; or (iv) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then following (x) a substantial adverse alteration in your title or responsibilities; (y) a reduction in your annual base salary or a material reduction in your annual target bonus opportunity; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof); provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice.

Change in Control

Form exclusively for grants to Chad Williams


		Company or its successor for reasons other than Cause as defined in any applicable employment agreement; or (iv) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in your title or responsibilities from those in effect immediately prior to the Change in Control; (y) a reduction in your annual base salary as of immediately prior to the Change in Control (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Change in Control; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Change in Control or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with your business travel obligations as of immediately prior to the Change in Control; provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice .
Forfeiture of Unvested Performance Share Units		Unless the termination of your Service triggers accelerated vesting of your PSUs or other treatment pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company or any Affiliate and you, you will automatically forfeit to the Company all of the PSUs that have not vested in the event you have a Separation from Service. Effective as of the Certification Date (as defined in Exhibit A) , you will forfeit to the Company all of the PSUs that do not become earned under the Award, as determined by the Committee.
Delivery		Delivery of the Shares represented by your vested PSUs shall be made within 30 days of the applicable vesting date set forth in Exhibit A , but not later than March 15 of the year following your Involuntary Termination, or, if earlier, within 30 days of your Separation from Service prior to the end of the Performance Period resulting in your immediate vesting of PSUs.
Forfeiture of Rights		If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of any the Company or any Affiliate or any confidentiality obligation with respect to the Company or any Affiliate or otherwise in competition with the Company or any Affiliate, the

Form exclusively for grants to Chad Williams


		Company has the right to cause an immediate forfeiture of your rights to the PSUs awarded under this Agreement and the PSUs shall immediately expire. In addition, if you have vested in PSUs during the three year period prior to your actions, you will owe the Company a cash payment (or forfeiture of Shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the Performance Shares or any other Shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Leaves of Absence		For purposes of this Agreement, you do not have a Separation from Service when you go on a bona fide leave of absence that was approved by your employer in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. You will have a Separation from Service in any event when the approved leave ends unless you immediately return to active employee work. Your employer may determine, in its discretion, which leaves count for this purpose, and when you have a Separation from Service for all purposes under the Plan in accordance with the provisions of the Plan. Notwithstanding the foregoing, the Company may determine, in its discretion, that a leave counts for this purpose even if your employer does not agree.
Withholding Taxes		You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting of the PSUs. In the event that the Company or any Affiliate determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the PSUs arising from this grant, the Company or any Affiliate shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested Shares otherwise deliverable under this Agreement).
Retention Rights		This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company or any Affiliate in any capacity.

Form exclusively for grants to Chad Williams


		Unless otherwise specified in an employment or other written agreement between the Company or any Affiliate and you, the Company or any Affiliate reserves the right to terminate your Service at any time and for any reason.
Shareholder Rights and Dividend Equivalent Rights		You have no rights as a shareholder of the Company (including, without limitation, the right to receive quarterly or special dividends) with respect to the PSUs unless and until a certificate for the Shares relating to the vested PSUs has been issued to you (or an appropriate book entry has been made). Notwithstanding the foregoing, the Company grants you a Dividend Equivalent Right relating to each PSU which vests, if any, pursuant to this Agreement or the Plan. If the Company declares a cash dividend on the Company’s outstanding Shares prior to the date the PSUs vest in accordance with Exhibit A and this Agreement, the amount of the cash dividend per Share declared prior to such vesting date shall be deemed to be reinvested in additional Shares. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Your Dividend Equivalent Right will be settled in a number of Shares equal to the number of PSUs which vest pursuant to this Agreement, multiplied by the number of additional Shares determined in accordance with the preceding sentence. Delivery of the Shares representing your Dividend Equivalent Right shall occur concurrently with the delivery of the Shares represented by your vested PSUs.
Clawback		This Award is subject to mandatory repayment by you to the Company to the extent you are or in the future become subject to any Company “clawback” or recoupment policy that requires the repayment by you to the Company of compensation paid by the Company to you in the event that you fail to comply with, or violate, the terms or requirements of such policy. If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws and you knowingly engaged in the misconduct, were grossly negligent in engaging in the misconduct, knowingly failed to prevent the misconduct or were grossly negligent in failing to prevent the misconduct, you shall reimburse the Company the amount of any payment in settlement of this Award earned or accrued during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document that contained such material

Form exclusively for grants to Chad Williams


		noncompliance. Notwithstanding any other provision of the Plan or any provision of this Agreement, if the Company is required to prepare an accounting restatement, then you shall forfeit any Shares received in connection with this Award (or an amount equal to the fair market value of such Shares on the date of delivery if you no longer hold the Shares) if pursuant to the terms of this Agreement, the amount of the Award earned or the vesting in the Award was explicitly based on the achievement of pre-established performance goals set forth in this Agreement (including earnings, gains, or other criteria) that are later determined, as a result of the accounting restatement, not to have been achieved.
Applicable Law		This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy		In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By accepting this grant, you give explicit consent to the Company to process any such personal data.
Purchase Price		If a purchase price is required by Applicable Law, it shall be deemed paid by your prior or future Service.
Electronic Delivery		The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, please contact Shirley Goza at shirley.goza@qtsdatacenter.com or 913-312-5503 to request paper copies of these documents.
Code Section 409A		For purposes of this Agreement, you shall have a “Separation from Service” when the Company reasonably anticipates that your level of Service will permanently decrease to no more than 20 percent of the average level of Service you have performed over the immediately preceding 36-month period (or such lesser period of your Service with the Company and its Affiliates), which shall be interpreted consistently

Form exclusively for grants to Chad Williams

with the provisions of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”).

It is intended that the Agreement comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Agreement will be interpreted and administered to be in compliance with Section 409A. To the extent that the Company determines that you would be subject to the additional taxes or penalties imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional taxes or penalties. The nature of any such amendment shall be determined by the Company. Notwithstanding anything to the contrary in this Agreement or the Plan, to the extent required to avoid accelerated taxation and penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Agreement during the six-month period immediately following your Separation from Service will instead be paid on the first payroll date after the six-month anniversary of your Separation from Service (or your death, if earlier). Each installment of PSUs that vests under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Section 409A.

By signing this Agreement, you agree to all of the terms and conditions described above and in the Plan.

Form exclusively for grants to Chad Williams

EXHIBIT A

The number of PSUs that may be earned under the Award (“ Earned PSUs ”) shall be based on based on the Company’s Run-Rate over the Performance Period, determined as follows:

Run-Rate for the Performance Period	Earned PSUs
$3.20	200% of the Target Number of PSUs
$3.00	100% of the Target Number of PSUs
$2.85	50% of the Target Number of PSUs
< $2.85	0% of the Target Number of PSUs

If the Run Rate for the Performance Period is less than $ 2.85 , none of the Target Number of PSUs shall be earned for the Performance Period.

If the Company’s Run Rate for the Performance Period equals $3.00 , then 100% of the Target Number of PSUs shall become Earned PSUs.

In no event shall more than 200% of the Target Number of PSUs set forth on the cover sheet become Earned PSUs under this Agreement.

Form exclusively for grants to Chad Williams

For purposes of this Exhibit A :

“ Performance Period ” shall mean the period commencing on January 1, 2019 and ending on December 31, 2020.

Exhibit 10.4

QTS REALTY TRUST, INC.

2013 EQUITY INCENTIVE PLAN

PERFORMANCE SHARE UNIT AGREEMENT

(Performance-Based Relative TSR Units)

Performance Share Units		This Agreement evidences an award of PSUs in the number set forth on the cover sheet and subject to the terms and conditions set forth in the Agreement and in the Plan.
The Plan		The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition, non-solicitation and/or severance agreement between you and the Company or any Affiliate shall supersede this Agreement with respect to its subject matter, unless explicitly superseded by this Agreement.
Transfer of Performance Share Units		The PSUs may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the PSUs be made subject to execution, attachment or similar process. If you attempt to do any of these things, the PSUs will immediately become forfeited.
Vesting		The PSUs shall become earned and vested in accordance with Exhibit A .
Certain Terminations		Notwithstanding the terms of any employment agreement between you and the Company or an Affiliate that addresses the treatment of equity awards upon a termination of employment, in the event of your Involuntary Termination on or prior to the Certification Date, you shall remain eligible to earn and vest in a pro rata portion of the number of PSUs that become earned and vested in accordance with Exhibit A , and no requirement to remain in continuous Service shall apply following such Involuntary Termination. The prorata portion described in the preceding sentence shall be equal to a fraction, (i) the numerator of which equals the number of days elapsed in the Performance Period through the date of your Involuntary Termination, and (ii) the denominator of which equals the total number of days in the Performance Period.

Change in Control

Notwithstanding the provisions of the Plan, upon the consummation of a Change in Control, the number of PSUs that will become earned under the Award shall be determined in accordance with Exhibit A . To the extent the PSUs are assumed, or equivalent restricted securities are substituted for the PSUs, by the Company or its successor, in connection with the Change in Control, the PSUs earned in accordance with Exhibit A will become 100% vested upon your Involuntary Termination within the 12-month period following the consummation of the Change in Control. If the PSUs are not assumed or substituted for in any Change in Control, then, notwithstanding the terms of the Plan, the number of PSUs that is earned in accordance with Exhibit A shall become fully vested.

For purposes of this section, “ Involuntary Termination ” means termination of your Service by reason of (i) your death; (ii) your Disability; (iii) your involuntary dismissal by the Company or its successor for reasons other than Cause; or (iv) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then as set forth in the Plan following (x) a substantial adverse alteration in your title or responsibilities from those in effect immediately prior to the Change in Control; (y) a reduction in your annual base salary as of immediately prior to the Change in Control (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Change in Control; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Change in Control or the Company's requiring you to be based anywhere other than such

		principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with your business travel obligations as of immediately prior to the Change in Control; provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice.
Forfeiture of Unvested Performance Share Units		Unless the termination of your Service triggers accelerated vesting of your PSUs or other treatment pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company or any Affiliate and you, you will automatically forfeit to the Company all of the PSUs that have not vested in the event you have a Separation from Service. Effective as of the Certification Date (as defined in Exhibit A) , you will forfeit to the Company all of the PSUs that do not become earned under the Award, as determined by the Committee.
Delivery		Delivery of the Shares represented by your vested PSUs shall be made within 30 days of the applicable vesting date set forth in Exhibit A , or, if earlier, your Separation from Service resulting in your immediate vesting of PSUs.
Forfeiture of Rights		If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of any the Company or any Affiliate or any confidentiality obligation with respect to the Company or any Affiliate or otherwise in competition with the Company or any Affiliate, the Company has the right to cause an immediate forfeiture of your rights to the PSUs awarded under this Agreement and the PSUs shall immediately expire. In addition, if you have vested in PSUs during the three year period prior to your actions, you will owe the Company a cash payment (or forfeiture of Shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the Performance Shares or any other Shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Evidence of Issuance		The issuance of the Shares with respect to your vested PSUs will be evidenced in such a manner as the Company, in its discretion, deems

		appropriate, including, without limitation, book entry, registration, or issuance of one or more share certificates.
Leaves of Absence		For purposes of this Agreement, you do not have a Separation from Service when you go on a bona fide leave of absence that was approved by your employer in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. You will have a Separation from Service in any event when the approved leave ends unless you immediately return to active employee work. Your employer may determine, in its discretion, which leaves count for this purpose, and when you have a Separation from Service for all purposes under the Plan in accordance with the provisions of the Plan. Notwithstanding the foregoing, the Company may determine, in its discretion, that a leave counts for this purpose even if your employer does not agree.
Withholding Taxes		You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting of the PSUs. In the event that the Company or any Affiliate determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the PSUs arising from this grant, the Company or any Affiliate shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested Shares otherwise deliverable under this Agreement).
Retention Rights		This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company or any Affiliate in any capacity. Unless otherwise specified in an employment or other written agreement between the Company or any Affiliate and you, the Company or any Affiliate reserves the right to terminate your Service at any time and for any reason.
Shareholder Rights and Dividend Equivalent Rights		You have no rights as a shareholder of the Company (including, without limitation, the right to receive quarterly or special dividends) with respect to the PSUs unless and until a certificate for the Shares relating to the vested PSUs has been issued to you (or an appropriate book entry has been made). Notwithstanding the foregoing, the Company grants you a Dividend Equivalent Right relating to each PSU which vests, if any, pursuant to this Agreement or the Plan. If the Company declares a cash dividend on the Company’s outstanding Shares prior to the date the PSUs vest in accordance with Exhibit A, the amount of the cash dividend per Share declared prior to such vesting date shall be deemed to be reinvested in

		additional Shares. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Your Dividend Equivalent Right will be settled in a number of Shares equal to the number of PSUs which vest pursuant to this Agreement, multiplied by the number of additional Shares determined in accordance with the preceding sentence. Delivery of the Shares representing your Dividend Equivalent Right shall occur concurrently with the delivery of the Shares represented by your vested PSUs.
Clawback		This Award is subject to mandatory repayment by you to the Company to the extent you are or in the future become subject to any Company “clawback” or recoupment policy that requires the repayment by you to the Company of compensation paid by the Company to you in the event that you fail to comply with, or violate, the terms or requirements of such policy. If the Company is required to prepare an accounting restatement due to the material noncompliance of the Company, as a result of misconduct, with any financial reporting requirement under the securities laws and you knowingly engaged in the misconduct, were grossly negligent in engaging in the misconduct, knowingly failed to prevent the misconduct or were grossly negligent in failing to prevent the misconduct, you shall reimburse the Company the amount of any payment in settlement of this Award earned or accrued during the 12-month period following the first public issuance or filing with the United States Securities and Exchange Commission (whichever first occurred) of the financial document that contained such material noncompliance. Notwithstanding any other provision of the Plan or any provision of this Agreement, if the Company is required to prepare an accounting restatement, then you shall forfeit any Shares received in connection with this Award (or an amount equal to the fair market value of such Shares on the date of delivery if you no longer hold the Shares) if pursuant to the terms of this Agreement, the amount of the Award earned or the vesting in the Award was explicitly based on the achievement of pre-established performance goals set forth in this Agreement (including earnings, gains, or other criteria) that are later determined, as a result of the accounting restatement, not to have been achieved.
Applicable Law		This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy		In order to administer the Plan, the Company may process personal

		data about you. Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By accepting this grant, you give explicit consent to the Company to process any such personal data.
Purchase Price		If a purchase price is required by Applicable Law, it shall be deemed paid by your prior or future Service.
Electronic Delivery		The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, please contact Shirley Goza at shirley.goza@qtsdatacenter.com or 913-312-5503 to request paper copies of these documents.
Code Section 409A		For purposes of this Agreement, you shall have a “Separation from Service” when the Company reasonably anticipates that your level of Service will permanently decrease to no more than 20 percent of the average level of Service you have performed over the immediately preceding 36-month period (or such lesser period of your Service with the Company and its Affiliates), which shall be interpreted consistently with the provisions of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”). It is intended that the Agreement comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Agreement will be interpreted and administered to be in compliance with Section 409A. To the extent that the Company determines that you would be subject to the additional taxes or penalties imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional taxes or penalties. The nature of any such amendment shall be determined by the Company. Notwithstanding anything to the contrary in this Agreement or the Plan, to the extent required to avoid accelerated taxation and penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Agreement during the six-month period immediately following your Separation from Service will instead be paid on the first payroll date after the six-month anniversary of your Separation from Service (or your death, if earlier). Each installment of PSUs that vests under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Section 409A.

By signing this Agreement, you agree to all of the terms and conditions described above and in the Plan.

EXHIBIT A

The number of PSUs that may be earned under the Award (“ Earned PSUs ”) shall be based on the Total Shareholder Return compared to the Market Return over the Performance Period, determined as follows:

Performance Level	Performance Achievement	Earned PSUs
Maximum	Total Shareholder Return is 50 percentage points or more greater than the Market Return	200% of Target Number of PSUs
Target	Total Shareholder Return equals the Market Return	100% of Target Number of PSUs
Threshold	Total Shareholder Return is below the Market Return, but no more than 50 percentage points below	50% of Target Number of PSUs
Below Threshold	Total Shareholder Return is more than 50 percentage points below the Market Return	0% of Target Number of PSUs

If the Total Shareholder Return is more than 50 percentage points below the Market Return, none of the Target Number of PSUs shall be earned for the Performance Period.

If the Total Shareholder Return equals the Market Return, then 100% of the Target Number of PSUs set forth on the cover sheet of this Agreement shall become Earned PSUs.

In the event that the Performance Level is between the “Threshold” and “Target” then a number of PSUs between 50% and 100% will become Earned PSUs, determined by linear interpolation; notwithstanding the foregoing, if the Total Shareholder Return for the Performance Period is negative, then the number of Earned PSUs shall not exceed the Target Number of PSUs set forth on the cover sheet.

In the event the Performance Level is between “Target” and “Maximum” (as set forth in the table above), then a number of PSUs between 100% and 200% will become Earned PSUs, determined by linear interpolation; notwithstanding the foregoing, if the Total Shareholder Return for the Performance Period is negative, then the number of Earned PSUs shall not exceed the Target Number of PSUs set forth on the cover sheet.

In no event shall more than 200% of the Target Number of PSUs set forth on the cover sheet become Earned PSUs under this Agreement.

Promptly following the completion of the Performance Period (and no later than seventy-five (75) days following the end of the Performance Period), the Committee will review and certify in writing (i) the Total Shareholder Return, (ii) the Market Return and (iii) the Earned PSUs, with any fractional PSUs rounded down to the next whole integer (such date, the “ Certification Date ”). Such certification will be final, conclusive, and binding. To the extent the Committee certifies a positive number of Earned PSUs, such Earned PSUs shall vest on the Certification Date, subject to your continued Service through such date.

Notwithstanding anything herein to the contrary, the Performance Period shall end as of the effective date of a Change in Control occurring on or prior to December 31, 2021. In such event, the Earned PSUs shall be based on the Change in Control Return compared to the Market Return, and the Change in Control Return shall replace the Total Shareholder Return in the table above in determining the Performance Level that has been achieved. Promptly following such a Change in Control, the Committee will review and certify in writing (i) the Change in Control Return, (ii) the Market Return and (iii) Earned PSUs. To the extent the Committee certifies a positive number of Earned PSUs, such Earned PSUs shall vest on December 31, 2021, subject to your continued Service through such date.

For purposes of this Exhibit A :

“ Performance Period ” shall mean the period commencing on January 1, 2019 and ending on December 31, 2021, provided, however, that in the event of a Change in Control occurring on or prior to December 31, 2021, the Performance Period shall end as of the effective date of such Change in Control.

“ Change in Control Return ” shall mean, with respect to the Performance Period, the total percentage return per share of Class A Common Stock, assuming contemporaneous reinvestment in the Class A Common Stock of all dividends and other distributions at the closing price of one share of Class A Common Stock on the date such dividend or other distribution was paid, based on the Initial Stock Price and the amount of consideration paid for each share of Class A Common in the Change in Control.

“ Closing Market Value ” shall mean the average value of the MSCI US REIT Index (RMS) over the thirty consecutive trading days that include and immediately precede the last day of the Performance Period.

“ Closing Stock Price ” shall mean the average closing price of one share of Class A Common Stock for the thirty consecutive trading days that include and immediately precede the last day of the Performance Period.

“ Initial Market Value ” shall mean the average value of the MSCI US REIT Index (RMS) over the thirty consecutive trading days immediately preceding the first day of the Performance Period.

“ Initial Stock Price ” shall mean the average closing price of one share of Class A Common Stock for the thirty consecutive trading days immediately preceding the first day of the Performance Period.

“ Market Return ” shall mean the percentage change of the MSCI US REIT Index (RMS) over the Performance Period, which shall be established by comparing the Initial Market Value to the Closing Market Value, provided, however, that in the event the MSCI US REIT Index is discontinued or its methodology significantly changed, a comparable index shall be selected by the Committee in good faith.

“ Total Shareholder Return ” shall mean, with respect to a Performance Period, the total percentage return per share of Class A Common Stock, assuming contemporaneous reinvestment in the Class A Common Stock of all dividends and other distributions at the closing price of one share of Class A Common Stock on the date such dividend or other distribution was paid, based on the Initial Stock Price and the Closing Stock Price for such Performance Period.

Exhibit 10.5

Form exclusively for grants to Chad Williams

QTS REALTY TRUST, INC.

2013 EQUITY INCENTIVE PLAN

PERFORMANCE SHARE UNIT AGREEMENT

(Performance-Based Relative TSR Units)


Performance Share Units		This Agreement evidences an award of PSUs in the number set forth on the cover sheet and subject to the terms and conditions set forth in this Agreement and in the Plan (the “Award”).
The Plan		The text of the Plan is incorporated in this Agreement by reference. Certain capitalized terms used in this Agreement are defined in the Plan, and have the meaning set forth in the Plan. This Agreement and the Plan constitute the entire understanding between you and the Company regarding this grant. Any prior agreements, commitments or negotiations concerning this grant are superseded; except that any written employment, consulting, confidentiality, non-competition, non-solicitation and/or severance agreement between you and the Company or any Affiliate shall supersede this Agreement with respect to its subject matter; provided, however, that by your acceptance of this grant of PSUs, you acknowledge and agree that, in the event of your Involuntary Termination, all references in your employment agreement to awards “fully vesting” or “vesting in full” or similar terms shall mean vesting at the Target number of PSUs set forth on the cover sheet unless such Involuntary Termination follows a Change in Control, in which case all references to awards “fully vesting” or “vesting in full” shall mean that the number of Earned PSUs as determined in accordance with Exhibit A shall be fully vested.
Transfer of Performance Share Units		The PSUs may not be sold, assigned, transferred, pledged, hypothecated or otherwise encumbered, whether by operation of law or otherwise, nor may the PSUs be made subject to execution, attachment or similar process. If you attempt to do any of these things, the PSUs will immediately become forfeited.
Vesting		The PSUs shall become earned and vested in accordance with Exhibit A .
Certain Terminations		In the event of your Involuntary Termination prior to the end of the Performance Period, you shall vest in the Target number of PSUs set forth on the cover sheet, and no requirement to remain in continuous Service shall apply following such Involuntary Termination. In the event of your Involuntary Termination at or following the end of the Performance Period, you shall become fully vested in any unvested

Form exclusively for grants to Chad Williams

Earned PSUs.

For purposes of this section, “ Involuntary Termination ” means termination of your Service by reason of (i) your death; (ii) your Disability, as defined in any applicable employment agreement or, if none, then as defined in the Plan; (iii) your involuntary dismissal by the Company or its successor for reasons other than Cause, as defined in any applicable employment agreement; or (iv) your voluntary resignation for Good Reason as defined in any applicable employment or severance agreement, plan, or arrangement between you and the Company, or if none, then following (x) a substantial adverse alteration in your title or responsibilities; (y) a reduction in your annual base salary or a material reduction in your annual target bonus opportunity; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof); provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice.

Change in Control

Form exclusively for grants to Chad Williams

		Control (or as the same may be increased from time to time) or a material reduction in your annual target bonus opportunity as of immediately prior to the Change in Control; or (z) the relocation of your principal place of employment to a location more than 35 miles from your principal place of employment as of the Change in Control or the Company's requiring you to be based anywhere other than such principal place of employment (or permitted relocation thereof) except for required travel on the Company's business to an extent substantially consistent with your business travel obligations as of immediately prior to the Change in Control; provided that, you have first given notice to the Company of the occurrence of an act described in (x), (y) or (z) within 90 days of the initial occurrence and the Company has not remedied such occurrence within 30 days after receipt of such notice.
Forfeiture of Unvested Performance Share Units		Unless the termination of your Service triggers accelerated vesting of your PSUs or other treatment pursuant to the terms of this Agreement, the Plan, or any other written agreement between the Company or any Affiliate and you, you will automatically forfeit to the Company all of the PSUs that have not vested in the event you have a Separation from Service. Effective as of the Certification Date (as defined in Exhibit A) , you will forfeit to the Company all of the PSUs that do not become earned under the Award, as determined by the Committee.
Delivery		Delivery of the Shares represented by your vested PSUs shall be made within 30 days of the applicable vesting date set forth in Exhibit A , but not later than March 15 of the year following your Involuntary Termination, or, if earlier, within 30 days of your Separation from Service prior to the end of the Performance Period resulting in your immediate vesting of PSUs.
Forfeiture of Rights		If you should take actions in violation or breach of or in conflict with any non-competition agreement, any agreement prohibiting solicitation of employees or clients of any the Company or any Affiliate or any confidentiality obligation with respect to the Company or any Affiliate or otherwise in competition with the Company or any Affiliate, the Company has the right to cause an immediate forfeiture of your rights to the PSUs awarded under this Agreement and the PSUs shall immediately expire. In addition, if you have vested in PSUs during the three year period prior to your actions, you will owe the Company a cash payment (or forfeiture of Shares) in an amount determined as follows: (1) for any Shares that you have sold prior to receiving notice from the Company, the amount will be the proceeds received from the sale(s), and (2) for any Shares that you still own, the amount will be the number of Shares owned times the Fair Market Value of the Shares on the date you

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			receive notice from the Company (provided, that the Company may require you to satisfy your payment obligations hereunder either by forfeiting and returning to the Company the Performance Shares or any other Shares or making a cash payment or a combination of these methods as determined by the Company in its sole discretion).
Evidence of Issuance			The issuance of the Shares with respect to your vested PSUs will be evidenced in such a manner as the Company, in its discretion, deems appropriate, including, without limitation, book entry, registration, or issuance of one or more share certificates.
Leaves of Absence			For purposes of this Agreement, you do not have a Separation from Service when you go on a bona fide leave of absence that was approved by your employer in writing if the terms of the leave provide for continued Service crediting, or when continued Service crediting is required by applicable law. You will have a Separation from Service in any event when the approved leave ends unless you immediately return to active employee work. Your employer may determine, in its discretion, which leaves count for this purpose, and when you have a Separation from Service for all purposes under the Plan in accordance with the provisions of the Plan. Notwithstanding the foregoing, the Company may determine, in its discretion, that a leave counts for this purpose even if your employer does not agree.
Withholding Taxes			You agree as a condition of this grant that you will make acceptable arrangements to pay any withholding or other taxes that may be due as a result of the vesting of the PSUs. In the event that the Company or any Affiliate determines that any federal, state, local or foreign tax or withholding payment is required relating to the vesting of the PSUs arising from this grant, the Company or any Affiliate shall have the right to require such payments from you, or withhold such amounts from other payments due to you from the Company or any Affiliate (including withholding the delivery of vested Shares otherwise deliverable under this Agreement).
Retention Rights			This Agreement and the grant evidenced hereby do not give you the right to be retained by the Company or any Affiliate in any capacity. Unless otherwise specified in an employment or other written agreement between the Company or any Affiliate and you, the Company or any Affiliate reserves the right to terminate your Service at any time and for any reason.
Shareholder Rights and Dividend Equivalent Rights			You have no rights as a shareholder of the Company (including, without limitation, the right to receive quarterly or special dividends) with respect to the PSUs unless and until a certificate for the Shares relating to the vested PSUs has been issued to you (or an appropriate

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book entry has been made).

Notwithstanding the foregoing, the Company grants you a Dividend Equivalent Right relating to each PSU which vests, if any, pursuant to this Agreement or the Plan. If the Company declares a cash dividend on the Company’s outstanding Shares prior to the date the PSUs vest in accordance with Exhibit A and this Agreement, the amount of the cash dividend per Share declared prior to such vesting date shall be deemed to be reinvested in additional Shares. Any such reinvestment shall be at Fair Market Value on the date of reinvestment. Your Dividend Equivalent Right will be settled in a number of Shares equal to the number of PSUs which vest pursuant to this Agreement, multiplied by the number of additional Shares determined in accordance with the preceding sentence. Delivery of the Shares representing your Dividend Equivalent Right shall occur concurrently with the delivery of the Shares represented by your vested PSUs.

Clawback

Notwithstanding any other provision of the Plan or any provision of this Agreement, if the Company is required to prepare an accounting restatement, then you shall forfeit any Shares received in connection with this Award (or an amount equal to the fair market value of such Shares on the date of delivery if you no longer hold the Shares) if pursuant to the terms of this Agreement, the amount of the Award earned or the vesting in the Award was explicitly based on the achievement of pre-established performance goals set forth in this Agreement (including earnings, gains, or other criteria) that are later determined, as a result of the accounting restatement, not to have been achieved.

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Applicable Law		This Agreement will be interpreted and enforced under the laws of the State of Maryland, other than any conflicts or choice of law rule or principle that might otherwise refer construction or interpretation of this Agreement to the substantive law of another jurisdiction.
Data Privacy		In order to administer the Plan, the Company may process personal data about you. Such data includes, but is not limited to, information provided in this Agreement and any changes thereto, other appropriate personal and financial data about you such as your contact information, payroll information and any other information that might be deemed appropriate by the Company to facilitate the administration of the Plan. By accepting this grant, you give explicit consent to the Company to process any such personal data.
Purchase Price		If a purchase price is required by Applicable Law, it shall be deemed paid by your prior or future Service.
Electronic Delivery		The Company may choose to deliver certain statutory materials relating to the Plan in electronic form. By accepting this grant you agree that the Company may deliver the Plan prospectus and the Company’s annual report to you in an electronic format. If at any time you would prefer to receive paper copies of these documents, please contact Shirley Goza at shirley.goza@qtsdatacenter.com or 913-312-5503 to request paper copies of these documents.
Code Section 409A		For purposes of this Agreement, you shall have a “Separation from Service” when the Company reasonably anticipates that your level of Service will permanently decrease to no more than 20 percent of the average level of Service you have performed over the immediately preceding 36-month period (or such lesser period of your Service with the Company and its Affiliates), which shall be interpreted consistently with the provisions of Section 409A of the Code and the regulations promulgated thereunder (“Section 409A”). It is intended that the Agreement comply with Section 409A to the extent subject thereto, and, accordingly, to the maximum extent permitted, the Agreement will be interpreted and administered to be in compliance with Section 409A. To the extent that the Company determines that you would be subject to the additional taxes or penalties imposed on certain nonqualified deferred compensation plans pursuant to Section 409A as a result of any provision of this Agreement, such provision shall be deemed amended to the minimum extent necessary to avoid application of such additional taxes or penalties. The nature of any such amendment shall be determined by the Company. Notwithstanding anything to the contrary in this

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Agreement or the Plan, to the extent required to avoid accelerated taxation and penalties under Section 409A, amounts that would otherwise be payable and benefits that would otherwise be provided pursuant to the Agreement during the six-month period immediately following your Separation from Service will instead be paid on the first payroll date after the six-month anniversary of your Separation from Service (or your death, if earlier). Each installment of PSUs that vests under this Agreement (if there is more than one installment) will be considered one of a series of separate payments for purposes of Section 409A.

By signing this Agreement, you agree to all of the terms and conditions described above and in the Plan.

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EXHIBIT A

Performance Level	Performance Achievement	Earned PSUs
Maximum	Total Shareholder Return is 50 percentage points or more greater than the Market Return	200% of Target Number of PSUs
Target	Total Shareholder Return equals the Market Return	100% of Target Number of PSUs
Threshold	Total Shareholder Return is below the Market Return, but no more than 50 percentage points below	50% of Target Number of PSUs
Below Threshold	Total Shareholder Return is more than 50 percentage points below the Market Return	0% of Target Number of PSUs

If the Total Shareholder Return is more than 50 percentage points below the Market Return, none of the Target Number of PSUs shall be earned for the Performance Period.

If the Total Shareholder Return equals the Market Return, then 100% of the Target Number of PSUs set forth on the cover sheet of this Agreement shall become Earned PSUs.

In no event shall more than 200% of the Target Number of PSUs set forth on the cover sheet become Earned PSUs under this Agreement.

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Notwithstanding anything herein to the contrary, the Performance Period shall end as of the effective date of a Change in Control occurring on or prior to December 31, 2021. In such event, the Earned PSUs shall be equal to the greater of (i) the Target number of PSUs set forth on the cover sheet; and (ii) the number calculated based on the Change in Control Return compared to the Market Return, with the Change in Control Return replacing the Total Shareholder Return in the table above in determining the Performance Level that has been achieved. Promptly following such a Change in Control, the Committee will review and certify in writing (i) the Change in Control Return, (ii) the Market Return and (iii) Earned PSUs. Such Earned PSUs shall vest on December 31, 2021, subject to your continued Service through such date.

For purposes of this Exhibit A :

“ Initial Market Value ” shall mean the average value of the MSCI US REIT Index (RMS) over the thirty consecutive trading days immediately preceding the first day of the Performance Period.

Form exclusively for grants to Chad Williams

Exhibit 10.6

FIRST AMENDMENT TO

SIXTH AMENDED AND RESTATED CREDIT AGREEMENT

THIS FIRST AMENDMENT TO SIXTH AMENDED AND RESTATED CREDIT AGREEMENT (this “Amendment”), entered into as of March 29, 2019 and to be effective as of February 26, 2019 (the “Effective Date”), by and among QUALITYTECH, LP , a Delaware limited partnership (“Borrower”), QTS REALTY TRUST, INC., a Maryland corporation (“REIT”) and THE ENTITIES LISTED ON THE SIGNATURE PAGES HEREOF AS GUARANTORS (“Subsidiary Guarantors”; together with REIT, are collectively hereinafter referred to as the “Guarantors”), KEYBANK NATIONAL ASSOCIATION (“KeyBank”), THE OTHER LENDERS WHICH ARE SIGNATORIES HERETO (KeyBank and the other lenders which are signatories hereto, collectively, the “Lenders”), and KEYBANK NATIONAL ASSOCIATION , a national banking association, as Agent (the “Agent” for the Lenders).

W I T N E S S E T H:

WHEREAS, Borrower, Agent, and each of the Lenders initially a signatory thereto entered into that certain Sixth Amended and Restated Credit Agreement dated as of November 30, 2018 ( as the same may be varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time , the “Credit Agreement”);

WHEREAS, REIT entered into that certain Fourth Amended and Restated Unconditional Guaranty of Payment and Performance dated as of November 30, 2018, for the benefit of Agent and the Lenders ( as the same may be varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time , the “Springing Guaranty”);

WHEREAS, Subsidiary Guarantors are parties to that certain Sixth Amended and Restated Unconditional Guaranty of Payment and Performance dated as of November 30, 2018, for the benefit of Agent and the Lenders ( as the same may be varied, extended, supplemented, consolidated, replaced, increased, renewed, modified or amended from time to time , the “Subsidiary Guaranty”);

WHEREAS, Borrower and Guarantors have requested that the Agent and the Lenders make certain modifications to the Credit Agreement;

WHEREAS, Borrower and Guarantors have requested that the Agent and the Lenders agree to certain waivers with respect to the Springing Guaranty; and

WHEREAS, the Agent and the Lenders have consented to such modifications and waivers, subject to the execution and delivery of this Amendment.

NOW, THEREFORE, for and in consideration of the sum of TEN and NO/100 DOLLARS ($10.00), and other good and valuable consideration, the receipt and sufficiency of which is hereby acknowledged, the parties hereto do hereby covenant and agree as follows:

1. Definitions . All terms used herein which are not otherwise defined herein shall have the meanings set forth in the Credit Agreement.

2. Modifications of the Credit Agreement . The Borrower, Agent and the Lenders do hereby modify and amend the Credit Agreement as follows:

(a) By modifying the definition of “Derivatives Contract” in §1.1 of the Credit Agreement by inserting the following text after the words “master agreement” in the ninth line thereof:

“; provided that the term “Derivatives Contract” shall not include any contract to hedge the purchase of electricity in the ordinary course of business”

(b) By amending and restating subpart (f) of the definition of “Indebtedness” in §1.1 of the Credit Agreement in its entirety as follows:

“all obligations of such Person in respect of any purchase obligation, repurchase obligation, takeout commitment or forward equity commitment or confirmation or forward equity sale agreement, in each case evidenced by a binding agreement (excluding (i) any such obligation to the extent the terms thereof provide that the obligation can be satisfied by the issuance of Equity Interests and (ii) any purchases of Real Estate, inventory or equipment in the ordinary course of business of such Person)”

(c) By modifying subpart (g) of the definition of “Indebtedness” in §1.1 of the Credit Agreement by inserting the following text after the word “thereof” in the nineteenth line thereof:

“(excluding any such obligation which is a forward equity commitment or confirmation or forward equity sale agreement to the extent the terms thereof provide that the obligation can be satisfied by the issuance of Equity Interests)”

(d) By amending and restating §8.12 of the Credit Agreement in its entirety as follows:

“ Neither the Borrower, the Guarantors nor any of their Subsidiaries shall contract, create, incur, assume or suffer to exist any Derivatives Contracts except for (i) Hedge Obligations and interest rate swap, collar, cap or similar agreements providing interest rate protection and currency swaps and currency options (including any Hedge Obligations) made in the ordinary course of business and (ii) forward equity commitments or confirmations and forward equity sale agreements (in each case regardless of whether they provide for settlement election by the seller) with customary terms (including, without limitation, being subject to the terms of a master agreement published by the International Swaps and Derivatives Association, Inc.); provided, that, to the extent such Derviative Contracts constitute Indebtedness, such Indebtedness is permitted pursuant to §8.1. ”

(e) By modifying subsection (g) of §12.1 of the Credit Agreement by inserting the text “included in Indebtedness” after the words “any Derivatives Contract” in each instance where such words appear in such subsection.

3. Waiver of Springing Recourse Event . Borrower has advised Agent and the Lenders that REIT has entered into a forward equity sale agreement, dated February 26, 2019, with Jefferies LLC, as forward purchaser, pursuant to which the REIT has agreed to issue an aggregate of 3,762,500 shares of its Class A Common Stock, par value $0.01 per share, to Jefferies LLC for a price per share of $39.84, subject to certain adjustments, which obligation is expected to be settled in full by March 1, 2020 (the “Forward Equity Transaction”). Notwithstanding anything to the contrary contained in Section 1 of the Springing Guaranty, to the extent that a Springing Recourse Event has occurred solely as a result of the Forward Equity Transaction, the Agent and Lenders hereby waive such occurrence and agree that a Springing Recourse Event shall be deemed to not have occurred. The execution and delivery of this Amendment by the Agent and the Lenders does not operate as a waiver of any other events that may result or may have resulted in a Springing Recourse Event, nor does it operate as a waiver of any of the other rights, powers or privileges of Agent and the Lenders under the Loan Documents. Further, notwithstanding the foregoing, REIT acknowledges and agrees that the Obligations guaranteed under the Springing Guaranty shall automatically become fully effective upon any event other than the Forward Equity Transaction that is a Springing Recourse Event and no other documentation shall be required to evidence same. In consideration for the waiver of Agent and the Lenders in this Section 3 of the Amendment, (a) REIT represents and warrants that except as expressly set forth in this Amendment, the Springing Guaranty remains unmodified and in full force and effect, and (b) REIT hereby ratifies, confirms and reaffirms the terms of the Springing Guaranty.

4. References to Credit Agreement . All references in the Loan Documents to the Credit Agreement shall be deemed a reference to the Credit Agreement as modified and amended herein.

5. Consent of Guarantors . By execution of this Amendment, Guarantors hereby expressly consent to the modifications and amendments relating to the Credit Agreement and the Loan Documents as set forth herein, and Borrower and Guarantors hereby acknowledge, represent and agree that the Loan Documents (including without limitation the Springing Guaranty and Subsidiary Guaranty) remain in full force and effect and constitute the valid and legally binding obligation of Borrower and Guarantors, respectively, enforceable against such Persons in accordance with their respective terms, and that the Springing Guaranty and Subsidiary Guaranty extends to and applies to the foregoing documents as modified and amended.

6. Representation s. Borrower and Guarantors represent and warrant to Agent and the Lenders as follows:

(a) Authorization . The execution, delivery and performance of this Amendment and the transactions contemplated hereby (i) are within the authority of Borrower and Guarantors, (ii) have been duly authorized by all necessary proceedings on the part of such Persons, (iii) do not and will not conflict with or result in any breach or contravention of any provision of law, statute, rule or regulation to which any of such Persons is subject or any judgment, order, writ, injunction, license or permit applicable to such Persons, (iv) do not and will not conflict with or constitute a default (whether with the passage of time or the giving of notice, or both) under any provision of the partnership agreement or certificate, certificate of formation, operating agreement, articles of incorporation or other charter documents or bylaws of, or any mortgage, indenture, agreement, contract or other instrument binding upon, any of such Persons

or any of its properties or to which any of such Persons is subject, and (v) do not and will not result in or require the imposition of any lien or other encumbrance on any of the properties, assets or rights of such Persons, other than the liens and encumbrances created by the Loan Documents.

(b) Enforceability . The execution and delivery of this Amendment are valid and legally binding obligations of Borrower and Guarantors enforceable in accordance with the respective terms and provisions hereof, except as enforceability is limited by bankruptcy, insolvency, reorganization, moratorium or other laws relating to or affecting generally the enforcement of creditors’ rights and the effect of general principles of equity.

(c) Approvals . The execution, delivery and performance of this Amendment and the transactions contemplated hereby do not require the approval or consent of or approval of any Person or the authorization, consent, approval of or any license or permit issued by, or any filing or registration with, or the giving of any notice to, any court, department, board, commission or other governmental agency or authority other than those already obtained.

(d) Reaffirmation . Borrower and Guarantors reaffirm and restate as of the date hereof each and every representation and warranty made by the Borrower, the Guarantors and their respective Subsidiaries in the Loan Documents or otherwise made by or on behalf of such Persons in connection therewith except for representations or warranties that expressly relate to an earlier date.

7. No Default . By execution hereof, the Borrower and Guarantors certify that the Borrower and Guarantors are and will be in compliance with all covenants under the Loan Documents after the execution and delivery of this Amendment, and that no Default or Event of Default has occurred and is continuing.

8. Waiver of Claims . Borrower and Guarantors acknowledge, represent and agree that Borrower and Guarantors as of the date hereof have no defenses, setoffs, claims, counterclaims or causes of action of any kind or nature whatsoever with respect to the Loan Documents, the administration or funding of the Loans or with respect to any acts or omissions of Agent or any of the Lenders, or any past or present officers, agents or employees of Agent or any of the Lenders, and each of Borrower and Guarantors does hereby expressly waive, release and relinquish any and all such defenses, setoffs, claims, counterclaims and causes of action, if any.

9. Ratification . Except as hereinabove set forth or in any other document previously executed or executed in connection herewith, all terms, covenants and provisions of the Credit Agreement remain unaltered and in full force and effect, and the parties hereto do hereby expressly ratify and confirm the Loan Documents as modified and amended herein. Nothing in this Amendment shall be deemed or construed to constitute, and there has not otherwise occurred, a novation, cancellation, satisfaction, release, extinguishment or substitution of the indebtedness evidenced by the Notes or the other obligations of Borrower and Guarantors under the Loan Documents (including without limitation the Springing Guaranty and the Subsidiary Guaranty).

10. Counterparts . This Amendment may be executed in any number of counterparts which shall together constitute but one and the same agreement.

11. Miscellaneous . This Amendment shall be construed and enforced in accordance with the laws of the State of Georgia (excluding the laws applicable to conflicts or choice of law). This Amendment shall be binding upon and shall inure to the benefit of the parties hereto and their respective permitted successors, successors-in-title and assigns as provided in the Loan Documents.

12. Effective Date . Upon the execution and delivery of this Amendment by Borrower, Guarantors, Agent and the Lenders, this Amendment shall be deemed effective and in full force and effect as of the Effective Date immediately prior to REIT entering into the Forward Equity Transaction.

[ SIGNATURES BEGIN ON THE FOLLOWING PAGE ]

IN WITNESS WHEREOF, the parties hereto have set their hands and affixed their seals as of the day and year first above written.


	BORROWER :

	QUALITYTECH, LP , a Delaware limited partnership

	By: QTS Realty Trust, Inc., a Maryland corporation, its general partner

	By:	/s/ Shirley E. Goza
	Name:	Shirley E. Goza
	Title:	Secretary and General Counsel

	(SEAL)

	GUARANTORS:

	QTS REALTY TRUST, INC. , a Maryland corporation

	By:	/s/ Shirley E. Goza
	Name:	Shirley E. Goza
	Title:	Secretary and General Counsel

(SEAL)