Data Center Solution Provider QTS Realty Trust Sees Sharp Decline In Share Price, Draws Censure From Significant Investor

The business realignment outlined by QTS Realty Trust earlier this week has one major shareholder pushing the data center solution provider to pursue "public to public M&A" as an alternative.

Land and Buildings Investment Management, which calls itself a "significant" investor in QTS, outlined several criticisms of the Overland, Kan.-based company's financial performance and management Thursday in a letter to investors. The public censure follows a sharp decline in QTS stock price, which fell 23 percent Wednesday on news of the company's revised strategic direction.

"QTS’s intrinsic value is substantially above the current depressed share price," wrote Jonathan Litt, Land and Buildings' founder and chief investment officer. "Data centers continue to trade at high valuations in the private market, and we believe the QTS net asset value is well above the current share price based on both public market M&A as well as comparable private market transactions."

[Related: QTS Shakes Up Exec Team, Realigns Business Around Hyperscale Hybrid Co-Lo Offerings ]

QTS plans to significantly narrow the scope of the C3 cloud and managed services business in order to double down on its hyper-scale and hybrid co-location offerings. Those offerings will now be considered "noncore" as the company seeks to simplify its product portfolio and improve predictability and efficiency.

"By refocusing 100 percent of the company's resources around hyper-scale and hybrid co-location, removing complexity in the business related to our C3 cloud products and aligning our cost structure to be a more efficient business model, we expect to achieve improved leasing performance and revenue growth with higher profitability and less volatility that can ultimately deliver enhanced long-term per share growth and performance," QTS Chairman and CEO Chad Williams told Wall Street analysts Wednesday.

Land and Building's Litt expressed doubt regarding the value-creating potential of QTS' restructuring, noting that its previously stated financial goals for 2020 appear to be out of reach, and added that "management's credibility is gone" in the wake of this week's share value loss.

"The company’s combination of unexpected churn events, uneven leasing, inability to translate excellent industry fundamentals to consistent growth, and messaging failures have been toxic to public investors," Litt wrote.

This week's stock price tumble came despite QTS reporting revenue of $118.9 million for the fourth quarter ended Dec. 31, an increase of 12.8 percent year over year that beat Seeking Alpha's projection by $680,000. The company also saw full-year sales of $446.5 million for fiscal 2017, up 11 percent from the previous year's mark of $402.4 million.

QTS, No. 64 on the CRN Solution Provider 500, later responded to Land and Buildings in a statement released Thursday – one that did not specifically address many of Litt's criticisms.

"Through continued efficient capital allocation and execution of our strategy, we expect to deliver disciplined growth and sustainable value to shareholders," the company said. "We look forward to continuing to engage with our shareholders to advance our common goal of further enhancing value."

QTS, which operates 18 data center locations in North America, is restructuring its sales organization so that the C1-Wholesale team will handle the company's top 30 hyper-scale customer accounts. QTS said the opportunity pipeline around hyper-scale "is four times larger than its pipeline at the beginning of 2017" in the initial release.

The strategic pivot will also see the QTS managed cloud portfolio shrink from 100 products to just 15, which the company said will "significantly" reduce business complexity.

"By exiting non-core products, the company expects to realize meaningful operating cost savings and enhanced predictability in the business. QTS expects to complete the exit of noncore products by the end of 2018," QTS wrote.

Finally, QTS outlined a cost reduction program aimed at reducing expenses associated with leased data center property rent, software licenses, communications, hardware and personnel.

In addition to the strategic shift, QTS disclosed a pair of changes at the senior executive level this week. COO of Sales and Marketing Dan Bennewitz will retire in 2018, and COO of Operations Jim Reinhart will be "transitioning out of the organization," the company said. David Robey will take the title of COO, and CTO John Greaves will assume more leadership responsibility in the hybrid co-location business.

The company has also begun its search for a chief revenue officer, who will be responsible for hybrid co-location sales and marketing.