QTS Realty Trust Inc is a US$2.3b mid-cap, real estate investment trust (REIT) based in Overland Park, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. Below, I’ll look at a few important metrics to keep in mind as part of your research on QTS.
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$170m makes up 61% of its gross profit, which means the majority of its earnings are high-quality and recurring.
QTS’s financial stability can be gauged by seeing how much its FFO generated each year can cover its total amount of debt. The higher the coverage, the less risky QTS is, broadly speaking, to have debt on its books. The metric I’ll be using, FFO-to-debt, also estimates the time it will take for the company to repay its debt with its FFO. With a ratio of 14%, the credit rating agency Standard & Poor would consider this as significantly high risk. This would take QTS 7.22 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.
Next, interest coverage ratio shows how many times QTS’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 5.58x, 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 13.78x, compared to the long-term industry average of 16.5x, meaning that it is slightly undervalued.
As a REIT, QTS Realty Trust offers some unique characteristics which could help diversify your portfolio. However, before you decide on whether or not to invest in QTS, I highly recommend taking a look at other aspects of the stock to consider:
- 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.
- 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.
- 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.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
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