Friday, March 19, 2021

A Small Cap Equity holding: QTS Realty Trust Inc. (QTS, $61.78): “Data-centric in the REIT world; Pricey but Worthy” by: Elisabeth Desmarais, AIM Student at Marquette University

 QTS Realty Trust Inc. (QTS, $61.78): “Data-centric in the REIT world; Pricey but Worthy”

By: Elisabeth Desmarais, AIM Student at Marquette University

Disclosure: The AIM Equity Fund currently holds this position. This article was written by myself, and it expresses my own opinions. I am not receiving compensation for it and I have no business relationship with any company whose stock is mentioned in this article.


   QTS Realty Trust Inc. is a real estate investment trust that operates in the data-centric world and owns now 27 infrastructures covering seven million square feet in the United States, Canada and Europe. The company offers hybrid colocation and hyper-scale expertise  to its customer and provides high level services that assure security, efficiency, flexibility and redundancy through its business. The innovative world of software and data is a constantly growing industry with high demands due to the networks services required by new technologies and large operations, thus making QTS a strong growth investment in the AIM portfolio. QTS has acquired 2 additional facilities since last added to our portfolio and has been yielding high and impressive rent especially in the state of Georgia and Atlanta where the company annualized 41% of its rent. QTS had been strong in other states including Virginia and Texas where it collects individually 16% and 13% of its total revenues in these targeted and profitable areas. QTS Realty Trust was founded in 2013 and is headquartered in Overland Park, KS. 

      Despite pricey shares, which can involve risk in the long run, QTS has continued to expand its businesses and improves it services provided. The company has reported its first quarterly results of the year with earnings of $0.33 EPS. 

 London Internet Exchange (LINX), who provides wide interconnection services, has announced this month that is will be expanding and partnering with QTS. LINX provides point of presence which will be deployed at QTS’ Ashburn campus, thus providing high-performance networks with a combination of switches, fast messages delivery and units processor through an open interconnection. 

   QTS general business model and operations takes part in this innovative and disruptive world that is constantly growing, making the company valuable with high potential growth in the following years.  

Key points: 

QTS was added into the portfolio in September 2020 at a price at $63.75 per share and is now priced at $61.78 per share, thus a small drop of ~3% from the purchase of QTS to this day. However, if we look at the data centers industry we can except a growth, thus potential higher stock price for QTS. This growth is driven by technology such as the Internet of Things, electric vehicles and another important innovation; 5G. For the period of 2020 to 2027, the market is expected to expand with a CARG reaching 6.4%. However, the business model of data center facilities can be expensive and include multiple miscellaneous expenses, and other costs for requirements such as cooling of infrastructure, power security and more, thus adding risks in this industry. QTS profits have not necessarily seen steady with high increase if looking at their statement from a non-real estate investment perspective. Thus, as a real estate investment fund, is it important to look at QTS’ FFOs performance instead of rental/net income only. QTS latest report show the company FFO’s increase from 160.6M in 2019 to 176M in 2020,  thus an approximate growth of 10% from the two periods.  While the pandemic has affected many sector during the pandemic, this was not the case for data centers REITs especially with the increase of companies moving their operations online, thus requiring more storage. Moreover, this industry has high barriers of entry, which makes it difficult for other companies to jump into this market and business mode.. According to that, this is giving QTS advantages on other competitive REIT sector such as office and retail. On the cash flow side on the company, we can say that QTS has been performant and has seen its operating cash flow growing at a faster pace than its funds from operations and revenues.

QTS has strong business model for future investing as well as a positive growing history, however, it does face some competition while operating in a strong market. However, competition can be hard to assess and compare due to the difference in sizes. QTS is in a good performing position and taking steps to growth and compete stronger with company such as Equinix. According to that, QTS has reported in its second quarter report of 2020 the increase of federal contracts and the expansion and growth of its capital expansion budget. This would allow the company to implement its scare feet coverage and be wider and get closer in size to companies like Equinix who operates in five continents at the moment. These bigger data companies have more resources and accesses to innovate which is the direction QTS is aiming for. To do that, QTS needs to outperform financially but also ethically and take many variables into consideration. QTS has been focusing on renewable energy and received a Direct Project management award that was related to the company affiliation with Citi for the purchase of units and the support of new projects and structures that help reducing market risk. In addition, QTS has been keeping its competitive advantage of power access and have reported for December 2020 that access of 1,055 megawatts is available to their collective facilities.

QTS is looking forward to expand their portfolio through valuable investment at favorable that will allow the company to increase its customer-base and revenues. One obstacles with the current pandemic, according to management, is the construction and development processes that have been extended to the negative impacts of COVID-19. However, the fact that QTS is recognize as an essential services entity allows the to fully operate at full staff capacity and respond to the data-centric world demand.      

What has the stock done lately?

QTS stock price as bee having a decreasing momentum in the past month period. Earlier this past month, the stock reached a high of 67$ following by steady 

QTS stock price as bee having a decreasing momentum in the past month period. Earlier this past month, the stock reached a high of 67$ following by steady increase and decrease. The stock is now reaching a lower price below $62 resulting in an approximate change of 8% for that period. The average price change of QTS sector as been a negative 2.73% and QTS individually has an average decreasing change of 5.10%, which is is the highest value reach by the stock in the past year price history. Thus, this is not a price trend that we see from QTS it as not been mention as a worry from management or analysts in regards of the stock. When compared to the Russell 2000, the AIM small cap benchmark, QTS has not outperformed the Russell over the past month down 3.57% vs. up of 5.33% for the Russell.                                                                                                                                                                                                                                                                   

1 Month Stock Chart

Source: FactSet

Past Year Performance: 

Over the past year (February 2020 – February 2021), QTS shares hit an all-time high of $72.59 before tumbling-down to its current price of $61.78, resulting in a change of ~17%. Now, comparing to the purchase price,  the current price value of the stock has had a small ~3% drop, from $63.75  to $61.78. The stock is currently trading at an EV/Sales multiple of 10.8x which is exceeding their 5 year average of 9.6x,. Therefore, we can conclude a positive momentum and expect the same for future reporting period.

1 Year Stock Chart vs. Benchmark

Source: FactSet

My Takeaway:

QTS should continue to stay in the AIM small cap portfolio for many factors including the growing data center world, technology evolution and their demands. While the stock price has been dropping, QTS has been expanding its operations and is in a good financial position to continue to do so and increases their earnings. QTS has been recognized for its sustainable operations and focus on environmental risk management which is a very important factors in the current market. The company has been in the top performant in this industry which has very high barriers of entry, thus increasing their competitive advantage overtime especially when considering our current economy. The demand for hypercale and hybrid colocation is expected to grow at high rate until 2027, thus bringing growth opportunity for QTS. Lastly, their open  interconnection partnership and operations with London Internet Exchange is something that will be interesting to follow along with the results.