Stock on the Run: QTS Realty Trust Inc. (NYSE: QTS)

On Friday, Shares of QTS Realty Trust Inc. (NYSE: QTS) gained 0.24% to $45.85. The stock grabbed the investor’s attention and traded 450,097 shares as compared to its average daily volume of 525.15K shares.

QTS Realty Trust, Inc. (QTS) recently declared operating results for the fourth quarter and full year ended December 31, 2018.

Financial Results

Quarterly Results

Net income recognized in the fourth quarter of 2018 was $6.40M ($0.02 net loss per basic and diluted share), contrast to net loss of $16.10M ($0.29 net loss per basic and diluted share) recognized in the fourth quarter of 2017. This change was mainly driven by a reduction in tax benefit and debt restructuring expense for the fourth quarter of 2018 contrast to the same period in 2017.

QTS generated total consolidated (includes both core and non-core) revenues of $112.30M in the fourth quarter of 2018, a decrease of 5.6% contrast to $118.90M in the fourth quarter of 2017. Consolidated (includes both core and non-core) MRR as of December 31, 2018 was $31.10M contrast to consolidated MRR as of December 31, 2017 of $31.70M. QTS generated total Core revenues of $112.30M in the fourth quarter of 2018, a boost of 11.6% contrast to $100.60M in the fourth quarter of 2017. Core MRR as of December 31, 2018 was $31.10M contrast to Core MRR as of December 31, 2017 of $27.20M.

QTS generated Core Operating FFO of $40.10M in the fourth quarter of 2018, a decrease of 2.2% contrast to Core Operating FFO of $41.00M in the fourth quarter of 2017. Excluding the effects of the Company’s non-cash deferred tax benefit/(expense), Core Operating FFO was $40.10M in the fourth quarter of 2018, a boost of 8.2% contrast to Core Operating FFO of $37.10M in the fourth quarter of 2017.

Moreover, QTS generated $59.30M of Core Adjusted EBITDA in the fourth quarter of 2018, a boost of 17.2% contrast to $50.60M for the fourth quarter of 2017.

2018 Results:

Net loss recognized for the year ended December 31, 2018 was $7.20M ($0.44 net loss per basic and diluted share), contrast to net income of $1.50M ($0.01 net income per basic and diluted share) recognized for the year ended December 31, 2017. The change was mainly driven by a boost in restructuring expense and a reduction in tax benefit for the year ended December 31, 2018 contrast to the same period in 2017.

QTS generated total consolidated (includes both core and non-core) revenues of $450.50M during the year ended December 31, 2018, a boost of 0.9% contrast to $446.50M during the year ended December 31, 2017. QTS generated total Core revenues of $422.80M during the year ended December 31, 2018, a boost of 14.1% contrast to $370.40M during the year ended December 31, 2017.

QTS generated Core Operating FFO of $149.30M during the year ended December 31, 2018 a boost of 8.6% contrast to Core Operating FFO of $137.50M during the year ended December 31, 2017 Excluding the effects of the Company’s non-cash deferred tax benefit, Core Operating FFO was $148.30M during the year ended December 31, 2018, a boost of 16.0% contrast to Core Operating FFO of $127.80M during the year ended December 31, 2017.

Moreover, QTS generated $218.10M of Core Adjusted EBITDA for the year ended December 31, 2018, a boost of 21.8% contrast to $179.10M for the year ended December 31, 2017.

Leasing Activity

During the quarter and year ended December 31, 2018, QTS reached new and modified renewal Core leases aggregating to $12.20M and $64.50M, respectively, of Core incremental annualized rent. The Company’s fourth quarter leasing performance was driven by strong sales in its hybrid colocation vertical, contributing over 75% of the quarter’s incremental annualized rent. Pricing on new and modified leases signed during the fourth quarter was lower than the prior four quarter average mainly driven by a higher proportion of larger footprint hybrid colocation deals signed in the fourth quarter, counting 5 deals in the 500 kilowatt to 2 megawatt range.

During the quarter and year ended December 31, 2018, QTS renewed Core leases with total annualized rent of $14.80M and $71.80M at an average rent per square foot of $292 and $268, respectively, which was 6.0% lower and 2.4% higher than the annualized Core rent before their respective renewals. The decline in the renewal rate of 6.0% was mostly because of three customers that signed commitments to significantly expand their respective footprints elsewhere in QTS’ footprint in addition to slight changes in their product mix, the net of which increased QTS’ MRR from these customers by 18%. If the lease renewals from these three customers were excluded from the renewal base, QTS’ renewal rates on a per square foot basis would have represented a 2.3% and 4.4% increase relative to the pre-renewal rate for the quarter and year ended 2018, respectively. There is variability in the Company’s renewal rates based on the mix of product types renewed, and renewal rates are generally expected to increase in the low to mid-single digits as contrast to pre-renewal pricing. Core Rental Churn (which the Company defines as Core MRR lost in the period to a customer intending to fully exit the QTS platform in the near term contrast to total Core MRR at the starting of the period) was 0.6% for the three months ended December 31, 2018, and 3.6% for the year ended December 31, 2018.

During the quarter and year ended December 31, 2018, QTS begind Core customer leases (which includes new Core customers and also existing Core customers that renewed their lease term) representing about $47.30M and $134.50M of annualized rent at $240 and $376 per square foot, respectively.

Balance Sheet and Liquidity

As of December 31, 2018, the Company’s total debt balance net of cash and cash equivalents was about $1.30B, resulting in a net debt to annualized Consolidated Adjusted EBITDA of 5.7x. This ratio compares to the 5.3x net debt to annualized Consolidated Adjusted EBITDA stated in the third quarter of 2018, with the increase mainly a result of additional capital development spending (inclusive of the acquisition of land in Atlanta, Georgia) in the fourth quarter of 2018 funded through the Company’s unsecured revolving credit facility.

In November 2018, the Company amended its unsecured credit facility to include a one-year extension, with reduced pricing and improved covenant flexibility. The amended unsecured credit facility has a total capacity of $1.52B and includes a $350.0M term loan which matures in December 2023, another $350.0M term loan which matures in April 2024, and an $820.0M revolving credit facility which matures in December 2022, with a one year extension option. Interest rates can vary based on leverage levels. The current interest rate on the term loans is LIBOR plus 1.3% and the current rate on the revolving credit facility is LIBOR plus 1.35%. This pricing represents a 20 basis point reduction from the interest rate on QTS’ credit facility before the amendment. The amended unsecured credit facility also provides for borrowing capacity of up to $200.0M in various foreign currencies, and a $500.0M accordion feature to increase the credit facility up to $2.02B, subject to certain conditions, counting consent of the agent and obtaining additional loan commitments.

In December 2018, the Company reached $600.0M of forward interest rate swap agreements. These include agreements that effectively extend existing floating to fixed interest rate swap agreements on $400.0M of term loan borrowings by an additional two years, coinciding with the respective maturity dates of the Company’s amended credit facility term loans. The weighted average effective fixed interest rate on the $400.0M notional amount of term loan financing, following the execution of these two year swap agreements, will approximate 3.9%, commencing on December 17, 2021 and April 27, 2022 ($200.0M of swaps allocated to each term loan), which effectively fixes the Company’s interest rate at 3.9% counting the 1.3% LIBOR spread in effect recently following the Company’s existing credit facility. The Company also reached forward interest rate swap agreements that effectively will fix the interest rate on an additional $200.0M of term loan borrowings from January 2, 2020 through the current maturity dates, which are December 17, 2023 and April 27, 2024 ($100.0M of swaps allocated to each term loan). The weighted average effective fixed interest rate on the $200.0M additional notional amount of term loan financing will approximate 3.9% commencing on January 2, 2020. Taking into account the additional interest rate swap agreements, the Company’s pro forma exposure to fixed rate debt, as of December 31, 2018, has been increased to about 74% of total debt from about 68% as of September 30, 2018.

As of December 31, 2018, the Company had total available liquidity of about $576.0M which was comprised of $564.0M of available capacity under the Company’s unsecured revolving credit facility and about $12.0M of cash and cash equivalents.

QTS has a market value of $2.53B while its EPS was booked as $-0.44 in the last 12 months. The stock has 55.11M shares outstanding. In the profitability analysis, the company has gross profit margin of 64.40% while net profit margin was -4.90%. Beta value of the company was 0.79; beta is used to measure riskiness of the security. Analyst recommendation for this stock stands at 2.20.

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