Track the companies that matter to you. It's FREE! Click one of these fan favorites to get started: Apple; Google; Ford.



Smart Money Is Investing Here -- Should You?

Don't let it get away!

Keep track of the stocks that matter to you.

Help yourself with the Fool's FREE and easy new watchlist service today.

On Oct. 9, 2013, a gutsy little company, QTS Realty Trust (NYSE: QTS  ) , rang the opening bell at the NYSE to celebrate its IPO. It was not front-page news. The shutdown of the federal government by Congress and looming debt ceiling debate certainly overshadowed the event.

However, there was no shortage of tweets regarding Twitter's plans for its upcoming IPO. Individual investors will soon have an opportunity to buy shares in a leading social media company where users co-create pop-culture trends in real time.

Surfing the wave of online memes requires an ocean
There is a bunch of mission-critical infrastructure behind each 140 character tweet.

If you believe in the growth prospects of a company like Twitter, it isn't a giant leap of faith to conclude that companies focused on providing the facilities and infrastructure for wireless communications, information technology, and e-commerce should prosper moving forward.

Wall Street just gave a big thumbs up to this asset class
Just a week prior to QTS Realty becoming a publicly traded data center REIT, a Prudential Financial real estate fund, PREI, invested in 80% of a joint venture created by Digital Realty (NYSE: DLR  ) . Digital contributed nine large data centers totaling just over one million square feet of 100% leased data center space. This JV was valued at $366 million, or $346 per square foot. 

This was the first time a highly regarded institutional investor had decided to make data centers part of its core real estate holdings. Smart money is beginning to flow into this REIT sector. PREI senior portfolio manager Cathy Marcus said, "The long lease terms and contractual rental rate increases on these Powered Base Building data centers provide a stable income stream..."

Does size really matter?
In the data center REIT sector, size does matter, but perhaps not in the way you may think. 

Digital Realty operates 127 facilities worldwide, serving over 600 customers totaling 23 million square feet. By comparison, QTS Realty operates 10 data centers supporting more than 850 customers in 3.8 million square feet -- with currently only 714,000 built out as raised floor space.

How has Digital Realty performed compared to its smaller peers?

DLR Total Return Price Chart

As you can see, not so well.

How does QTS stack up to its larger rivals?
If you look at who is incubating the most customers with potential for growth, Digital Realty isn't the leader. Based upon company websites, Digital Realty has over 600 tenants; CoreSite (NYSE: COR  ) , who focuses on interconnection, has over 750 customers; and newly minted QTS, as of June 30, 2013 had 870 customers.

One metric to keep an eye on
The number of customers per 1,000 square feet might be an indicator of future growth potential for data center REITs. Let's face it, not all technology companies will thrive over time. 

The large Fortune 500 companies have the resources to build and operate data centers without impacting the bottom line. On the other hand, small to mid-size companies need to reinvest capital into core business initiatives, or they will wither and die.

That is not to say that large companies can't benefit from outsourcing IT, but the sales cycle is likely going to be a long process.

Why a disappointing debut may be an opportunity
When you look at customers per 1,000 square feet of data center space, QTS Realty is the leader, with a 870 customers leasing 714,000 square feet for a ratio of 1.19. CoreSite Realty, which has outperformed the sector, has 750 customers leasing 1.2 million square feet, a ratio of just 0.63. Sector giant Digital Realty has the fewest customers -- 600 -- who lease 23 million square feet of space -- the greatest amount -- yielding a tiny ratio of 0.026. 

Please keep in mind that is a back-of-the-envelope metric, not an industry standard.

Investor takeaway
Based upon SEC filings, QTS had hoped to raise $356 million based upon the projected mid-range IPO pricing of $28.50 per share. They actually sold 12.5 million shares at $21.00 per share, raising only $257 million.

QTS Realty's poor IPO debut may be a blessing in disguise for investors -- if you believe that big data, wireless communications, and e-commerce are growing faster than the economy as a whole. QTS Realty is planning to spend $277 million to add 312,000 square feet of customer space over the next two years.

The QTS Realty IPO is looking attractive from both a growth and a value perspective.

More thriving tech stocks
The tech world has been thrown into chaos as the biggest titans invade one another's turf. At stake is the future of a trillion-dollar revolution: mobile. To find out which of these giants is set to rule the next decade, we've created a free report called "Who Will Win the War Between the 5 Biggest Tech Stocks?" Inside, you'll find out which companies are set to dominate, and we'll give in-the-know investors an edge. To grab a copy of this report, simply click here -- it's free!

Read/Post Comments (0) | Recommend This Article (4)

Comments from our Foolish Readers

Help us keep this a respectfully Foolish area! This is a place for our readers to discuss, debate, and learn more about the Foolish investing topic you read about above. Help us keep it clean and safe. If you believe a comment is abusive or otherwise violates our Fool's Rules, please report it via the Report this Comment Report this Comment icon found on every comment.

Be the first one to comment on this article.

Compare Brokers

Fool Disclosure

Sponsored Links

Leaked: Apple's Next Smart Device
(Warning, it may shock you)
The secret is out... experts are predicting 458 million of these types of devices will be sold per year. 1 hyper-growth company stands to rake in maximum profit - and it's NOT Apple. Show me Apple's new smart gizmo!

DocumentId: 2677552, ~/Articles/ArticleHandler.aspx, 9/26/2016 11:56:16 PM

Report This Comment

Use this area to report a comment that you believe is in violation of the community guidelines. Our team will review the entry and take any appropriate action.

Sending report...

Today's Market

updated 2 hours ago Sponsored by:
DOW 18,094.83 -166.62 -0.91%
S&P 500 2,146.10 -18.59 -0.86%
NASD 5,257.49 -48.26 -0.91%

Create My Watchlist

Go to My Watchlist

You don't seem to be following any stocks yet!

Better investing starts with a watchlist. Now you can create a personalized watchlist and get immediate access to the personalized information you need to make successful investing decisions.

Data delayed up to 5 minutes

Related Tickers

9/26/2016 4:02 PM
COR $77.42 Down -0.05 -0.06%
CoreSite Realty CAPS Rating: **
DLR $97.64 Down -0.31 -0.32%
Digital Realty Tru… CAPS Rating: ****
QTS $54.07 Down -0.24 -0.44%
QTS Realty Trust CAPS Rating: No stars