Is The Huge McGraw Hill Financial Data Center Deal Just the Tip of the Iceberg for QTS Realty Trust?

Just after the closing bell on July 2, 2014 QTS Realty Trust (NYSE: QTS  ) released a stunning two-part announcement regarding a strategic partnership with Atos SE, an international IT services company, as part of a blockbuster data center deal with McGraw Hill Financial, (NYSE: MHFI  ) . Quite frankly, both parts of this announcement are huge deals.

Most investors are more familiar with $22.8 billion cap McGraw Hill iconic brands such as:

  • Standard & Poor's Rating Services
  • S&P Capital IQ
  • S&P Dow Jones Indices
  • J.D. Power
  • McGraw Hill Construction

Data has been the heart and soul of this information and analytics powerhouse dating back as far as 1888. Selecting QTS Realty as the company to own and operate such a mission critical facility certainly will send a shockwave throughout the entire data center REIT sector.

Why do companies outsource?
Large enterprises are faced with the challenging task of deciding how to securely store and ultimately use this data as a profit center to grow earnings. Data center REITs provide outsourcing solutions for areas that are not part of their customer core competencies such as: security, compliance issues, climate control, connectivity, resilience, and how to best provide reliable yet cost effective power. Green power may be an important consideration as well.

All data centers are capital intensive to build and own. Is that capital that would be better served deployed in core business initiatives? Probably.

A relationship with a large data center REIT aids in planning for disaster recovery and quicker deployment of new initiatives. The list is almost endless, and I have yet to use the word "cloud," or "hybrid" even one time!

A rising tide lifts all boats
CyrusOne CEO Gary Wojtaszek recently shared that approximately 90% of all the data in the world has been created in just the past two years. This is not a trend which is expected to change anytime soon, in fact it is likely to accelerate.

The first half of 2014 has been particularly successful for shareholders of both industry giant $7.9 billion Digital Reality Trust (NYSE: DLR  ) and its much smaller rival QTS, which currently sports a market cap of just $837 million. At first I was a bit stunned that Digital Realty didn't snag this deal. Digital has an extensive global footprint similar to both Atos and McGraw Hill.

Large campuses in the U.S.
Sometimes size can be deceptive. A cornerstone of the QTS business plan is based upon acquiring large infrastructure rich facilities at a low initial cost basis.

The acquisition and lease-back of an existing 560,000 square foot facility, containing 58,000 SF of raised floor with 12 megawatts of power fits this mold perfectly. Plus, this facility comes with a blue chip anchor tenant.

This 194 acre New Jersey trophy property is currently under-utilized by McGraw Hill, as there is the ability to add another 100,000 SF of raised floor and 20 megawatts of power.

Scale check: a one-story 560,000 SF building has a footprint of ~12.5 acres under roof!

Green with envy, or envy the green?
There is nothing small about this data center campus, even its green energy component. In fact, that aspect is absolutely gigantic. There is a 50 acre, 14.1 megawatt solar field adjacent to this facility. It is one of the largest privately owned solar facilities in the western hemisphere.

Again, to help put that into perspective, the sun is providing enough electricity to easily power well over 14,000 homes in the region.

The Atos partnership may be the real long-term win for QTS
Concurrently with the purchase of this East Windsor campus, QTS entered into 10-year lease, and 15-year option with international technology services giant Atos. This arrangement also serves as the foundation for a strategic partnership between QTS and Atos North America moving forward. That could prove to be a real game changer, as well as a platform for QTS to expand internationally.

QTS will own large scale enterprise data centers, providing Atos with its custom data center, or C1, offering as well as Critical Facilities Management, or CFM services. In turn, Atos will package the QTS offerings with its own comprehensive suite of IT services solutions, targeting blue chip enterprise customers.

Atos has global client base, served by 76,000 employees in 52 countries.

Investor takeaway
It looks like QTS has morphed rather quickly from the gutsy little company IPO in Oct. 2013 to the 800lb gorilla I had envisioned back in March, 2014.

Income investors may prefer Digital Realty's proven dividend history, and current 5.7% yield. Digital Realty currently provides investors with a way to profit from international data growth. On the other hand, many investors may be more attracted to small-cap QTS' long-term growth potential -- plus a dividend currently yielding 4%. That happens to be my pick moving forward.

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Bill Stoller

Sipping a latte at the corner of Wall Street & Main Street -- where real estate often intersects with trends in: technology, retailing, office/industrial, residential, healthcare, energy infrastructure & green initiatives.

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9/3/2015 4:02 PM
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