On Oct. 9, 2013, a gutsy little company, QTS Realty Trust Inc (NYSE:QTS), rang the opening bell at the NYSE to celebrate its IPO. It was not front-page news. The shutdown of the federal government by Congress and looming debt ceiling debate certainly overshadowed the event.
However, there was no shortage of tweets regarding Twitter's plans for its upcoming IPO. Individual investors will soon have an opportunity to buy shares in a leading social media company where users co-create pop-culture trends in real time.
There is a bunch of mission-critical infrastructure behind each 140 character tweet.
If you believe in the growth prospects of a company like Twitter, it isn't a giant leap of faith to conclude that companies focused on providing the facilities and infrastructure for wireless communications, information technology, and e-commerce should prosper moving forward.
Wall Street just gave a big thumbs up to this asset class Just a week prior to QTS Realty becoming a publicly traded data center REIT, a Prudential Financial Inc (NYSE:PRU) real estate fund, PREI, invested in 80% of a joint venture created by Digital Realty Trust, Inc. (NYSE:DLR). Digital contributed nine large data centers totaling just over one million square feet of 100% leased data center space. This JV was valued at $366 million, or $346 per square foot.
This was the first time a highly regarded institutional investor had decided to make data centers part of its core real estate holdings. Smart money is beginning to flow into this REIT sector. PREI senior portfolio manager Cathy Marcus said, "The long lease terms and contractual rental rate increases on these Powered Base Building data centers provide a stable income stream..."
Does size really matter? In the data center REIT sector, size does matter, but perhaps not in the way you may think.
Digital Realty operates 127 facilities worldwide, serving over 600 customers totaling 23 million square feet. By comparison, QTS Realty operates 10 data centers supporting more than 850 customers in 3.8 million square feet -- with currently only 714,000 built out as raised floor space.
How has Digital Realty performed compared to its smaller peers?
As you can see, not so well.
How does QTS stack up to its larger rivals? If you look at who is incubating the most customers with potential for growth, Digital Realty isn't the leader. Based upon company websites, Digital Realty has over 600 tenants; CoreSite Realty Corp (NYSE:COR), who focuses on interconnection, has over 750 customers; and newly minted QTS, as of June 30, 2013 had 870 customers.
One metric to keep an eye on The number of customers per 1,000 square feet might be an indicator of future growth potential for data center REITs. Let's face it, not all technology companies will thrive over time.