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Investing In Property Through QTS Realty Trust, Inc. (NYSE:QTS)

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QTS Realty Trust, Inc. is a US$2.8b mid-cap, real estate investment trust (REIT) based in Overland Park, United States. REITs own and operate income-generating property and adhere to a different set of regulations. This impacts how QTS’s business operates and also how we should analyse its stock. I’ll take you through some of the key metrics you should use in order to properly assess QTS.

Check out our latest analysis for QTS Realty Trust

Funds from Operations (FFO) is a higher quality measure of QTS's earnings compared to net income. This term is very common in the REIT investing world as it provides a cleaner look at its cash flow from daily operations by excluding impact of one-off activities or non-cash items such as depreciation. For QTS, its FFO of US$191m makes up 67% of its gross profit, which means the majority of its earnings are high-quality and recurring.

NYSE:QTS Historical Debt, June 14th 2019

In order to understand whether QTS has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take QTS to pay off its debt using its income from its main business activities, and gives us an insight into QTS’s ability to service its borrowings. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take QTS 7 years to pay off using just operating income, which is a long time, and risk increases with time. But realistically, companies have many levers to pull in order to pay back their debt, beyond operating income alone.

I also look at QTS's interest coverage ratio, which demonstrates how many times its earnings can cover its yearly interest expense. This is similar to the concept above, but looks at the upcoming obligations. The ratio is typically calculated using EBIT, but for a REIT stock, it's better to use FFO divided by net interest. With an interest coverage ratio of 6.65x, it’s safe to say QTS is generating an appropriate amount of cash from its borrowings.

In terms of valuing QTS, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. QTS's price-to-FFO is 14.82x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.

Next Steps:

In this article, I've taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. QTS Realty Trust can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:

  1. Future Outlook: What are well-informed industry analysts predicting for QTS’s future growth? Take a look at our free research report of analyst consensus for QTS’s outlook.
  2. Valuation: What is QTS worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether QTS is currently mispriced by the market.
  3. Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.

We aim to bring you long-term focused research analysis driven by fundamental data. Note that our analysis may not factor in the latest price-sensitive company announcements or qualitative material.

If you spot an error that warrants correction, please contact the editor at editorial-team@simplywallst.com. This article by Simply Wall St is general in nature. It does not constitute a recommendation to buy or sell any stock, and does not take account of your objectives, or your financial situation. Simply Wall St has no position in the stocks mentioned. Thank you for reading.