QTS Realty Trust (NYSE: QTS) operates 26 data center facilities across the United States and two more in the Netherlands, with more than 7 million square feet of space dedicated to providing technology infrastructure and connectivity to more than 1,200 customers.
Data centers that provide mission-critical uptime to countless businesses and individuals are a poster child for essential businesses, and QTS, based in the Kansas City suburb of Overland Park, Kansas, is one of only five real estate investment trusts (REITs) in that subset of industrial REITS.
The other four are Digital Realty Trust (NYSE: DLR), Equinix (NASDAQ: EQIX), CyrusOne (NASDAQ: CONE), and CoreSite Realty (NYSE: COR) -- and with a market cap of $4.2 billion as of Aug. 21, QTS is the smallest by that particular measure, although at $6 billion, CoreSite is close. CyrusOne was at $10 billion at that point, Digital Realty and Equinix at $43 billion and $69 billion, respectively.
All these businesses should presumably benefit now and going forward for one obvious reason: They provide off-site data services, which have been skyrocketing in use for years and the value of which was only underscored by the pandemic.
So, is QTS a buy? That's a definite maybe.
Paying a dividend while growing FFO
REITs are required to pass along most of their earnings to shareholders, and in this case, QTS' Board of Directors has authorized a cash dividend of $0.47 per share on its common stock for the third quarter of 2020. That's while many other dividend-paying REITs suspended theirs.
For the second quarter, QTS reported net income of $10.2 million, up significantly from the $7.5 million in the year-ago quarter, on total revenue of $131.6 million, up 10.5%, from the second quarter of 2019.
That key measure of funds from operations (FFO) also was positive for the quarter, at $48.7 million compared with $40.8 million from the year-ago quarter.
The company also said it has signed a contract for a mega center for a federal agency and that it renewed $19.6 million in leases at an average annualized increase of 2.6% in rent. That's a positive in an environment where rental increases can be hard to come by.
Reasons for optimism about future business
QTS generates income from three customer verticals: hybrid colocation, hyperscale, and federal contracts.
As chairman and CEO Chad Williams, who founded the company in 2003, said in his company's July 28 earnings call: "Enterprises' and hyperscale customers' appetite for data is accelerating, and we're able to serve an important role in unlocking the various data sets enabling key services that are critical for customers to effectively manage their mission-critical IT infrastructure.
"This is particularly true during the COVID-19 pandemic, which has significantly limited customers' ability to physically manage their IT assets on-site and increased their appreciation for SDP's (QTS's software-defined data center platform) capability to enable remote infrastructure tracking and management."
As the pandemic got legs, in fact, the company says it saw unique logins grow by 20% among its more than 1,200 customers from the first quarter to the second and that overall engagement with its core platform has roughly doubled from pre-COVID-19 metrics.
Along with that came an 85% jump in quarterly signings for IP bandwidth upgrades as well as other large increases in expanded remote services.
All this is additional revenue that the company says is high-margin revenue that will bolster the revenue that its data center real estate already generates.
The future business also looks steady
Along with those second-quarter renewals, which was the third consecutive quarter where leasing results were at or about $20 million, the company says it has a backlog of signed, but not yet commenced, annualized revenue of approximately $111 million at the end of the quarter. A predominance of five- to 10-year contracts also lends stability.
"In an environment where COVID-19 is creating far-reaching disruptions and uncertainty across a variety of industries, we're pleased that the significant backlog continues to provide strong visibility into our future growth," Williams, the founder, and CEO, said in the earnings call.
Modest dividend yield, maybe room to grow
Meanwhile, that $0.47 per share declared for the third quarter continues a history of steadily growing dividends that has seen its payback per share rise from $0.24 a share at the end of 2013.
While the current yield of 2.78% is lower than the average of 2.96% for industrial REITs, it's still higher than bonds and other fixed-income instruments right now, and with the essential nature of its business, probably as reliable.
The stock price, too, could have room to grow. QTS closed at $67.83 on Aug. 21 after dipping as low as about $43 in March. The latest price puts it at close to its 52-week high of $72.60, but again, for a long-term hold, this issue deserves some consideration.
There are higher yields available, certainly, and stocks that appear to have more room to run to previous highs, but QTS Realty Trust does have a long track record in a relatively new industry that arguably is about as essential as anything nowadays short of selling food and shelter.
And you never know, some deep pockets may come along and buy it!