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Here’s Why QTS Realty Trust Is Plunging Today

By Matthew Frankel, CFP® - Feb 21, 2018 at 10:57AM

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Shares of the data center REIT are down by nearly 20% even though it beat earnings estimates.

What happened

QTS Realty Trust (QTS), a real estate investment trust specializing in data center properties, surpassed expectations on both the top and bottom lines in its fourth-quarter earnings report, but shares are plummeting on Wednesday. As of 11:53 a.m. EST, the stock was down by nearly 20%, and had been off by as much as 28% earlier in the day.

In a nutshell, there were two things in the company's earnings report that seemed to frighten investors: weak guidance and restructuring.

Rows of computer equipment in a data center.

Image Source: Getty Images.

So what

First, QTS reported 2018 funds-from-operations guidance in the range of $2.55 per share to $2.65 per share, well short of analysts' consensus expectation for $2.90. Such a guidance miss is often enough to move a stock lower post-earnings all by itself.

Second, and more significantly, the company announced a restructuring plan that involves "re-focusing our organization around the two primary drivers of demand in our business, Hyperscale and Hybrid Colocation," according to CEO Chad Williams.

Williams said that the simplification of the business will lead to increased long-term profitability, but the company's press releases indicates that many aspects of the restructuring, such as the exit of its non-core products, will take most of 2018 to complete.

Now what

QTS has received one major analyst downgrade so far, and more could certainly be on the way. The problem is the uncertainty that a long-term reorganization effort such as this one creates. If it's successful, today's lower share prices could prove in retrospect to have been an excellent bargain buying opportunity for long-term gains. For the time being, though, I wouldn't be surprised to see the stock linger at lower valuations than it was previously given.

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