Strong Q2 Reports Continue Coming in From U.S. Data Center REITs

Digital stabilizing as younger rivals continue aggressive expansion.

Yevgeniy Sverdlik

August 7, 2014

4 Min Read
Strong Q2 Reports Continue Coming in From U.S. Data Center REITs
Digital Realty’s 365 Main data center in San Francisco is home to the new point of presence for AMS-IX (Photo: Digital Realty Trust)

Following strong second-quarter earnings reports of their peers DuPont Fabros Technology and CoreSite Realty Corp., the other three major U.S. data center real estate investment trusts – Digital Realty Trust, QTS Realty Trust and CyrusOne – reported that they too had a positive second quarter.

U.S. data center providers are operating in positive overall market conditions. All five REITS reported year-over-year revenue gains and all five have leased out lots of data center space during the three months.

Digital Realty, which finished the first quarter by announcing changes in business strategy, reported progress on execution of those changes, and S&P revised its outlook on the world’s largest data center REIT, changing it from negative to stable.

Digital Realty was a pioneering data center REIT, having formed and gone public in 2001. The company has recently been sailing in rough waters, however, including the sudden departure of its founding CEO Mike Foust in March.

Both QTS and CyrusOne had their IPOs as REITs last year. The two firms have continued expanding their portfolios, which grew substantially during the second quarter.

Digital Realty stabilizing, ready to ‘prune’ portfolio

Things began looking up for Digital Realty in the second quarter, as the company continued executing on the strategic changes introduced earlier this year. The changes include identifying underperforming properties and selling them, as well as diversifying product portfolios to offer more than its traditional space-and-power deals.

The company has identified the properties it will prune from its portfolio and said it would start marketing them after Labor Day, or early next month.

Bill Stein, Digital Realty CFO and interim CEO, said the company was seeing positive results in the market for data center deals that are smaller than its traditional wholesale leases. “Our mid-market segment continues to gain traction, and our colocation product offering generated good results with over $5 million in signed revenue during the quarter,” he said.

The company signed leases totaling about 17 megawatts of capacity during the quarter, the bulk of it in North American markets. Average per-kW rate in North America was the lowest: $154, compared to $185 in Europe and $201 in Asia Pacific. The leases will add a total of about $3.5 million per month to the company’s revenue.

While Digital Realty’s revenue for the quarter was up, it reported a drop in funds from operations (equivalent of earnings per share) from $1.22 per share in the second quarter of 2013 to $1.20 per share in the most recently completed quarter. The company reported $401 million in revenue for the quarter, up 10 percent year over year.

QTS on expansion kick

QTS reported revenue of $51.3 million for the quarter – up 20 percent year over year. Its FFO was $0.50 per share. The company’s net income for the quarter was $3.9 million – a major improvement from the $1.2 million loss it reported for the same period last year.

It signed a total of 335 leases during the quarter, amounting to about 70,000 square feet of data center space. While it is a REIT, QTS has a much more varied service portfolio than Digital Realty does, which includes custom data center space, retail colocation, cloud and managed services.

Unlike Digital Realty, which is in portfolio pruning and optimization mode, QTS is in massive portfolio expansion mode. During the quarter the company bought a 12-megawatt New Jersey data center from McGraw Hill Financial, which it says it can expand to 20 megawatts, and the former Sun Times Press facility in downtown Chicago, which it plans to redevelop and turn into a 25-megawatt data center.

Also during the quarter QTS brought online about 45,000 square feet of new data center space and continued construction in Texas, Georgia, Virginia and California. Cumulatively, the company expects those construction projects to yield more than 80,000 square feet of rentable data center space before the end of the year.

CyrusOne shrinks quarterly loss

CyrusOne reported a massive revenue gain. Its $82 million second-quarter revenue represented a 28-percent year-over-year increase. The company is still losing money, but it has managed to shrink its losses substantially, reporting a $3.6 million loss for the quarter, compared to a $6.8 million loss it reported for the same quarter one year ago.

Like QTS, it has had a strong leasing quarter as it continued to expand its data center portfolio. The REIT leased about 60,000 square feet of colocation space (about 17 megawatts of power) and about 17,000 square feet of office space during the quarter.

Among the deals signed during the three months were leases with four Fortune 1,000 customers that have not taken space with CyrusOne before. The company now has about 650 customers total, 140 of which are Fortune 1,000 companies.

It is building in Texas, Virginia and Arizona, expecting to bring online 120,000 square feet of colocation space over the course of the second half of the year. CyrusOne's biggest ongoing construction project is in Phoenix, where the company is building a 1 million-square-foot campus. About half of the space leased during the second quarter consisted of pre-leases in the upcoming Phoenix data center.

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