It’s the ultimate intersection of the old school and the new, where real estate, big data, and cloud computing come together.
And it makes for an investment theme that meets a time-honored trifecta: diversification, value, and growth.
Broadly speaking, “Big Data” represents content and “cloud computing” is infrastructure.
The Internet of Things will one day become the Internet of Everything. And then we’ll be talking about “fog computing,” a term coined by Cisco Systems Inc. (CSCO) to describe the need to bring the advantages and power of cloud computing closer to where the data is actually being generated and acted upon.
All of it requires vast amounts of service and storage.
Today, we’re going to talk about a way to profit that has its roots in the “old” economy: real estate.
Publicly traded real estate is essentially an asset class unto itself, a fact recognized by Standard & Poor’s with its decision to separate the group from the “Financials” category.
Indeed, REIT returns are driven by the real estate market cycle, whereas the returns of most non-REIT companies in the stock market – small- or large-cap, value or growth – are driven by the much shorter and much different business cycle.
The most important diversification characteristic of REITs is simply the first two words in their category: real estate.
Elevating real estate to a headline sector under the Global Industry Classification Standard (GICS) will also increase the visibility of REITs.
Industrial REITs own and manage industrial facilities and rent space in those properties to tenants.
Some industrial REITs focus on specific types of properties, such as warehouses and distribution centers. Others concentrate on highly specialized fields, such as biochemistry and life sciences.
A certain segment of the industrial REIT category will benefit from explosive growth in data storage requirements. It will be driven by the continuing revolution in connectivity, defined by “cloud” technology and, soon, “fog” computing: those who own, develop, operate and/or manage data centers.
Data centers are designed to protect and secure the IT infrastructure of the customers who use them. These data centers provide many functions, including powering and cooling the servers stored there by internet and enterprise companies around the world.
QTS Realty Trust Inc. (QTS), with a market cap of $2.6 billion, is the smallest of six publicly traded REITs focused on data.
(Since we’re being “technical” today, the annual index reconstitution process conducted by FTSE Russell found that in the United States, the breakpoint between large-cap and small-cap stocks for 2016 is $2.9 billion. This breakpoint is down 15% from $3.4 billion in 2015 – the first such decline since 2012.)
As the smallest of the group, let’s focus on QTS.
The company’s portfolio includes investments in data centers located primarily in the United States, with others in Canada, Europe, and the Asia-Pacific region. Its core data center products are referred to as “3Cs,” which consist of Custom Data Center (C1), Colocation (C2) and Cloud and Managed Services (C3).
QTS debuted on the New York Stock Exchange on Oct. 18, 2013. Twitter Inc. (TWTR) IPO’d on Nov. 15, 2013.
QTS is up about 150% since it started trading. Twitter is down about 60%.
The S&P 500 is up 27.6% over the same time.
QTS also pays a decent quarterly dividend. From an initial level of $0.24 per share, the regular payout has grown to $0.36. That’s 50% growth in a little less than three years. At current levels, QTS is yielding 2.6%.
And it continues to grow at a remarkable pace.
Revenue for the second quarter was up 45% year over year, as net operating income surged 44%.
Operating funds from operations (OFFO) – the REIT equivalent of earnings – were up 49%, with OFFO per share up 18% to $0.63. Management reported a booked-but-not-billed backlog of $49 million.
QTS completed the acquisition of a 38-acre facility in Piscataway, New Jersey that should add $7.5 million to recurring revenue and approximately $3 million to earnings before interest, taxation, depreciation, and amortization.
Greater New York/New Jersey comprises the second-largest Tier 1 data center market in the United States. And fundamentals there are getting stronger due to a slowdown in data center supply. Vacancy rates have declined from 25% to 16% over the past two years.
And in July, it opened a new facility in Chicago, marking its entry into one of the tightest Tier 1 markets in the United States.
Back in December 2013, Gartner forecast that the number of connected devices in use (not including the many billions of PCs, tablets and smartphones) would grow from 0.9 billion in 2009 to 26 billion units by 2020.
The total amount of digital data generated in 2013 was about 3.5 zettabytes (3.5 billion terabytes).
But by 2020, the world will generate 40 zettabytes of data annually – about one million photographs or 1,500 HD movies for every single person on the planet.
That’s a storage problem QTS is well-positioned to solve.
“Every person who invests in well-selected real estate in a growing section of a prosperous community adopts the surest and safest method of becoming independent, for real estate is the basis of wealth.”
Editorial Director, Wall Street Daily