QTS Realty Trust: Carpathia Hosting Acquisition - Immediately Accretive

Many investors may be unaware that QTS was originally an acronym for Quality Technology Services. On May 6, data center REIT QTS Realty Trust QTS reminded investors when it announced the $326 million acquisition of privately held cloud services provider Carpathia Hosting, Inc. In the publicly traded data center REIT space, QTS Realty closest two peers are:  CoreSite Realty Trust COR - $2.18 billion cap, 3.65 percent yield.  CyrusOne CONE - $1.6 billion cap, 4 percent yield.  QTS Realty Trust - $1.25 billion cap, 3.57 percent dividend yield. Tale Of The Tape - Past Year Investors in data center REITs have benefited from the exponential growth of big data, cloud computing and wireless data. Larger Competitors Industry stalwart $8.7 billion Digital Realty DLR, and $2.5 billion DuPont Fabros DFT have historically been focused on wholesale data center customers, rather than colocation or service bundles. Both DuPont and Digital have made significant management changes which could signal a change in direction. Digital and DuPont currently pay investors the highest dividend yields, 5.5 percent and 5.32 percent, respectively; and have also delivered total returns that exceed the RMZ the past year. QTS Secret Sauce - C3 Cloud & Managed Services The QTS secret syrup may be buying large infrastructure rich campuses at a low cost basis in order to deliver "mega-data centers," which can be leased at competitive prices. However, the QTS secret sauce has to be its industry lead in C3 cloud & managed services, and that is precisely where this relatively large Carpathia Hosting acquisition could be a huge boost moving forward. QTS is also well positioned to benefit from another enterprise customer trend, which is the outsourcing of non-core tasks to third-party providers. Carpathia Deal In A Nutshell  Carpathia Hosting: Colocation, Hybrid Cloud, and Managed Services provider purpose-built to deliver on the complex, compliant private and hybrid cloud and managed services requirements of highly demanding enterprises and public sector agencies.  Deal Terms: $290 million cash, plus assumption of ~$36 million of capital leases.  Immediately Accretive: expected $0.10 of accretion for OFFO per share and $0.25 for AFFO per share in 2016E, respectively; 2H 2015E annualized adjusted EBITDA multiple, (pro forma for synergies), of 9.6x and first year ROIC of ~17 percent. How Carpathia Fits In  Synergies: QTS existing focus on security, compliance and managed services is magnified by the Carpathia management team and boots on the ground. What Carpathia Adds  Customer Base: QTS has over 850 customers, Carpathia boosts that to well over 1,000; with a significant presence in key verticals, including: Federal Agencies, Private Cloud, Hybrid Cloud and International.  Security & Compliance: adds to existing QTS initiatives, such as Fed RAMP, HIPAA, etc. Pins In The Map  Geography: Carpathia has both a facility overlap in North America, as well as an international presence in both Europe and Asia.  Expansion: Where Carpathia properties overlap, QTS has much larger facilities in many cases to migrate customers who wish to expand. QTS Bottom Line Investor Takeaway According to the QTS release, this significant acquisition is immediately accretive, always a concern for existing shareholders. The estimated ROIC of ~17 percent, "and growing," exceeds the QTS key metric of 15 percent ROIC. The real benefits and synergies of this deal are likely to play out in the longer term, as it appears Carpathia will assist QTS in accelerating growth in key vertical markets; where quality of services -- rather than being the low cost provider -- could be the major decision factor for many potential customers.