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1 Way To Play Data Centers

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1 Way To Play Data Centers
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On Monday, Deutsche Bank analyst Vin Chao published a research note on QTS Realty Trust Inc (NYSE: QTS) reinstating the data center REIT as a Buy prior to the company's 2Q15 earnings release.

In May 2015, QTS Realty announced its acquisition of Carpathia Hosting, Inc., a company focused on colocation and providing cloud and managed services to enterprise and government customers.

The combined company owns 25 data centers in 14 markets, including five international markets; Chao believes that Carpathia "further differentiates its business from peers."

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QTS Realty has a "3C" product mix: C1 custom data center builds, C2 colocation and C3 cloud and managed services.

Related Link: QTS Realty Trust: Carpathia Hosting Acquisition Can Be Immediately Accretive

Chao noted that the Carpathia acquisition skews the QTS Realty revenue mix significantly toward the higher MRR (monthly recurring revenue) per square foot colocation and cloud services products.

Tale Of The Tape: Past Year

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During the past 52 weeks, QTS Realty has traded in a range of $24.84–$41.25 per share.

Data Center REIT Peer Comparison

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QTS Realty, along with its closest data center REIT peers CoreSite Realty Corp (NYSE: COR) and CyrusOne Inc (NASDAQ: CONE), has significantly outperformed the broader equity REIT sector.

Related Link: CoreSite Kicks Off Data Center REIT Earnings With Record Q2 Leasing

CoreSite's main focus is on colocation and interconnection customers, while CyrusOne primarily serves Fortune 1000 enterprise data center customers.

The Carpathia acquisition bolsters the QTS Realty FedRamp compliant government agency offerings "and enhances its security/compliance differentiation," according to Chao.

Carpathia To Be Immediately Accretive

QTS Realty issued 5.7 million new common shares at $37 per share, a 2.2 percent discount at the time, in conjunction with the acquisition.

Based on Carpathia's 1Q15 earnings, Chao noted QTS Realty's "management expects Carpathia to add $32 million to 2H15 EBITDA on an annualized basis, and $34 million in 2016 following $2 million of synergies. On OFFO and FAD, Carpathia is expected to add 1c and 10c in 2015, respectively, and 10c and 25c in 2016, respectively."

Chao thinks that these numbers are achievable and, in fact, may be conservative.

QTS Realty's private equity sponsor General Atlantic (GA) also sold shares, reducing its ownership from 25 to 20 percent. The GA share overhang would be reduced a further 2 percent if the underwriter greenshoe was fully subscribed.

Deutsche Bank On QTS Realty: Reinstate At Buy, $44 PT

The Deutsche Bank revised $44 target price represents a potential ~8.6 percent upside from the prior close of $40.50, and a 12-month total return of 11.8 percent, including the dividend.

The $44 price target was based on "a 50:50 blend of [Deutsche Bank's] FAD multiple-based target (17.0x 2-yr forward FAD estimate) and our EBITDA multiple-based target (14.5x 2-yr forward EBITDA estimate)."

Chao noted that this represents a "modest premium" to peers based on 2015 estimates "weighted by QTS's product split."

The QTS Realty revenue mix of C1, C2 and C3 including Carpathia "moves to 31 percent, 42 percent, and 27 percent, respectively, from 43 percent, 49 percent, and 8 percent, respectively," according to the research note.

Deutsche Bank: QTS Realty PT Risks

Chao noted, "The key downside risks for QTS Realty are tied to development lease-up, limited trading volume, and continued ownership overhang from its PE sponsor. QTS Realty also faces industry risks associated with supply/demand trends and increasing penetration of public cloud deployments."

Investor Takeaway

The QTS Realty 2Q15 earnings announcement is scheduled for August 4 after the market closes with the conference call the following morning at 10:00 a.m. Eastern Time to discuss the results.

Image Credit: Public Domain

Latest Ratings for QTS

DateFirmActionFromTo
Dec 2016GuggenheimInitiates Coverage OnBuy
Oct 2016Raymond JamesInitiates Coverage onOutperform
Aug 2016JefferiesMaintainsBuy

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