QTS Reports Positive First Year as Public REIT

QTS Realty has reported results for its first full year as a publicly traded Real Estate Investment Trust. Results were on the whole positive, but were greatly assisted by a blockbuster 19-megawatt deal with an unnamed tenant closed during the year.

The company converted into a public REIT as part of its IPO late in 2013. Other data center providers that recently converted to public REIT status are CyrusOne and Equinix, although the latter is still awaiting official regulatory approval.

QTS kept busy since the IPO, investing $300 million in expansion and bringing 180,000 square feet of data center space online. In 2014, it reached 2 million square feet of powered-shell space across its portfolio, up from 1.8 million square feet at the end of 2013.

The company will hit a major milestone this year, reaching 1 million square feet of built-out space. It currently has 927,000 square feet and plans to bring close to 100,000 square feet online this year.

Planned expansions in 2015 include over 40,000 square feet in Richmond, Virginia, 31,000 square feet in Dallas, and 25,000 square feet in Atlanta.

In addition to the 19-megawatt deal, highlights of the year include bringing online a Dallas-Fort Worth data center and key acquisitions and deals in Chicago and New Jersey. Its Princeton, New Jersey data center is now also acting as showcase for a recently launched critical facilities management practice. The company also achieved the elusive FedRAMP certification, which puts it in a strong position to win federal government deals, and continued to expand its services offerings, adding disaster recovery as a service in September.

Expectations were high for QTS and data center REITs in general. QTS slightly beat analyst expectations, with higher funds from operations than expected. Funds from operations is a common REIT measuring stick.

Revenue for the total year was $217.8 million, up 22 percent. The company had $59.6 million in revenue in the fourth quarter, 3 percent higher than in Q3.

QTS focuses on its 3 Cs portfolio, the three Cs being Custom data centers, Colocation, and Cloud. C1 is big, strategic wholesale deals; C2 is retail colo; C3 is cloud and managed services. C3 deals generate higher revenue per square foot.

There was no C1 activity in the fourth quarter, but new and modified leases were up 10 percent, which suggests an increasingly better services mix. Average revenue per square foot for C2 and C3 is $1,025, or much higher than with C1. C1 deals are strategic, big customers.

Pricing for new and modified deals was above the four-quarter average because of increased C2 and C3 activity.

Revenue guidance for 2015 is between $225 million and 275 million, the company expressing comfort in its booked-not-billed pipeline, new strategic assets, and the growth of its higher revenue per square foot C3 cloud and managed services portfolio.

Room for Growth

QTS is using less than half of its total building-shell space and has capacity to more than double the amount of raised floor in its inventory. Additionally, the company owns land adjacent to all of its mega data centers. The room to grow is there.

Of the space online and available, utilization as of the third quarter was 85 percent, not including space that's booked but not billed. There was no space brought online in Q4, as planned, but over 80,000 square feet was added in Q3.

Utilization rates are good, but it’s not a simple metric to evaluate. QTS is one of many providers attempting to diversify its services mix beyond big wholesale deals. The utilization rate doesn’t include powered shell, "booked but not billed," and the revenue per square foot ranges across its offerings.

Many of the impressive growth metrics for 2014 can be directly attributed to that 19-megawatt deal across Richmond and Atlanta metro facilities. The company's net operating income highlights were Atlanta (up 19 percent) and Richmond (up 53 percent). Third biggest net operating income gain was California -- up 12 percent.

Richmond was a bright spot beyond the big deal, however. This time last year, it had 52,000 square feet leased. It ends the year with 137,000 square feet leased. Last April, Richmond was highlighted in a discussion with DCK.

The company signed a new customer in the healthcare industry, who took multiple cloud and managed services in Richmond. An insurance provider who used to take colocation space in Richmond expanded its services to include Disaster Recovery as a Service offering out of Atlanta.

Focus on Chicago, Jersey

Chicago and Princeton are important strategic markets for 2015. The company believes Chicago will play out very similar to the Dallas facility. Both locations are key markets that are on the must-serve list for national providers. Dallas had great pre-selling activity, but the market has also been supply-constrained as of late.

"Chicago is one of the dots we’ve been trying to put on the map for some time," one QTS official said on the recent earnings call.

The company’s strategy is acquiring infrastructure-rich assets in strategic new markets on a low-cost basis, which it succeeded in doing in Chicago.

Chicago is really two markets: downtown, where the carrier hotel at 350 E Cermak is the big dog, and the suburbs. It’s more expensive in the city. The new QTS Chicago location is strategically located a few miles south of the financial district.

Princeton is the flagship for what the company wants to accomplish with the critical facility management practice. The 200-acre property has about 600,000 square feet of facilities with 175,000 square feet of shell.