QTS Realty Trust Inc Could Become an 800lb Gorilla

While it is much too early in the game to crown QTS Realty Trust as king of the data center REITs, this newly listed company has a growth game plan proving profitable right out of the gate. One week after the its IPO on Oct. 9, 2013, I wrote a Motley Fool article highlighting the fact that this company has far more customer density than its rivals. This strategy is beginning to pay dividends.

DLR Total Return Price Chart
DLR Total Return Price Chart

QTS secret syrup
QTS is an acronym for Quality Technology Services. At first glance it seems to be a strange name for a company with real estate operations sufficient to be granted REIT status by the IRS. However -- similar to fried chicken and waffles -- it actually is a perfect recipe. Combining the real estate ingredients with cloud service offerings makes QTS more than just another data center landlord. It makes them a hybrid solutions provider.

QTS has three different platforms, or the 3C's, in its business model: Custom data centers, Co-location, and finally Cloud and managed services. Approximately 60% of revenues are generated from the latter two platforms -- on average, pricing for these leases has increased over 16% in the past four quarters.

Already this year, QTS has announced a number of big developments. In the public sector, the company is developing a cloud storage solution exclusively for federal agencies and government contractors. In the private space, a 25,000 square foot data center is slated to be completed by July of this year, while the repurposing of a 700,000 square foot property is underway with the potential to house 1.4 million square feet of data center construction.

QTS secret sauce
Sporting a market cap of only $565 million, QTS owns 10 U.S. data centers totaling 3.8 million square feet. QTS currently has just over 1.2 million square available for active development and 2 million square feet held for future development. By way of comparison, $7 billion sector giant Digital Realty owns 131 properties totaling 24.5 million square feet in 33 markets throughout North America, Europe, Asia, and Australia.

During the Feb. 21, 2014 QTS earnings conference call, QTS founder and CEO Chad Williams shared this key aspect of his strategy:

"Going forward, we will continue to look for opportunities to acquire assets at low cost that are infrastructure-rich in strategic new markets. This can be accomplished either by buying or repurposing non-data center facilities, or acquiring enterprise-owned data centers that are under-utilized by their current enterprise owners."

Show me the money

QTS Dividend Yield (TTM) Chart
QTS Dividend Yield (TTM) Chart

QTS paid shareholders a prorated $0.24 per share dividend for the quarter ending Dec. 31, 2013 and announced a 20% dividend increase to $0.29 per share for 2014, putting its yield already in line with peers.

Year over year, QTS grew their funds from operation over 90% in 2013. Based on the current estimate $75 million in FFO, the company looks to be trading at just 12.6x FFO -- a low valuation for such huge growth.

Investor takeaway
The QTS strategy of buying large strategically located facilities coupled with the huge opportunity in cloud-based services seems like a great plan. QTS targets a 15% return on invested capital and reported achieving 15.5% for 2013. Although QTS real estate allows it to compete as a low cost provider, leveraging the growth of cloud computing to provide unique hybrid solutions is driving higher margins and faster growth.

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The article QTS Realty Trust Inc Could Become an 800lb Gorilla originally appeared on Fool.com.

Bill Stoller has no position in any stocks mentioned. The Motley Fool has no position in any of the stocks mentioned. Try any of our Foolish newsletter services free for 30 days. We Fools may not all hold the same opinions, but we all believe that considering a diverse range of insights makes us better investors. The Motley Fool has a disclosure policy.

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