Data center real estate investment trust (REIT) CyrusOne is rumored to be looking to sell itself to the highest bidder. One-time peer QTS Realty sold itself to Blackstone last year. The number of options for investors in this sector is dwindling, with just a couple of really big names and a few smaller ones left.
This is why more aggressive types of investors might want to take a look at CoreSite Realty (NYSE: COR), the highest-yielding pure-play data center REIT. Here are some things to consider as you dig into the name.
1. Relatively tiny company
CoreSite has a market cap of around $6.3 billion. That's not a small company, per se. However, when you put that figure up against peers like Digital Realty and Equinix -- with market caps of $41 billion and $71 billion, respectively -- CoreSite is clearly a small fry in the industry. For reference, CyrusOne, which looks like it may end up getting bought out at some point soon, has a market cap of $9.6 billion.
Some benefits come with size, not the least of which is access to capital. Since building data centers is a big piece of the growth story here, that's a notable issue facing CoreSite. However, being small isn't all bad. It takes a lot of capital spending to grow the top and bottom lines when your market cap is as large as Digital Realty's and Equinix's -- CoreSite doesn't need as much spending to move the needle.
Clearly, if you prefer to focus on industry giants, CoreSite shouldn't even be on your watch list. But if you are willing to dig in a bit more to find a good yield, keep reading.
2. Focused portfolio
The interesting thing about data center REITs is that they serve multiple different end customers. The biggest users are the cloud providers, like Amazon and Google, which buy in bulk. However, given their size, they can command low prices. Names like Digital Realty and Equinix compete fiercely in that space, given that it's basically the only way to get really big in the data center niche.
CoreSite's business has exposure to this space, at about a third of its rent roll. However, the rest is split between enterprise and network customers. The company has more pricing power in these spaces and, in fact, only does what are known as 'hyperscale deals' on an opportunistic basis. While it doesn't have a mom-and-pop focus, per se, the goal is to target customers for which service and quality are important differentiating factors in the buying decision.
This helps to make customers sticky and has led to material internal growth opportunities, noting that nearly 90% of its rent signed activity has come from existing clients. Put another way, as CoreSite's customers have grown, they have continued to stick around and, importantly, buy more capacity.
3. Internal growth opportunities
Growing in this business generally means building. However, CoreSite has roughly 37 megawatts of available capacity in its system from previous expansion efforts, so there's ample room to grow without aggressively building new assets.
That said, it has a modest amount of capacity under construction (around 10 megawatts) and another 46 megawatts that it can develop in the future if -- more likely when -- demand requires it. In other words, there's ample room for CoreSite to grow as companies increasingly look to move high-value internal computing into the cloud and hybrid cloud.
And given its open capacity, it doesn't need to spend huge amounts of money to do it unless there's enough demand to justify additional material spending.
4. Promising dividend
As a REIT, one of the most important things for investors to consider is a company's dividend record. CoreSite has increased its dividend for 11 straight years, putting it on the Dividend Achievers list. It's not a particularly old REIT either, so that's an impressive record.
Meanwhile, the yield is just about 3.6%. That's not huge on an absolute basis, but the story in the data center space is growth, so this is a growth and income name, not a high-yield one. However, it is interesting to note that CoreSite's yield is the highest in the data center REIT space and materially more than what you would get from industry giant Equinix, which has a tiny 1.4% yield.
One reason for this is that CoreSite's adjusted funds from operations (AFFO) payout ratio is on the high side. Using the most recent dividend payment as a run rate and comparing it to the REIT's projected 2021 AFFO guidance, the dividend payout ratio could be as high as 92% this year -- definitely in worrisome territory. However, that number should come down as the REIT leases out more empty space in its facilities (highlighted in point three).
5. An additional consideration
So far, it looks like CoreSite is something of a sharpshooter looking to focus on the most profitable niches of the data center space. It isn't looking to get big just for the sake of getting big if that means taking on more and more less profitable businesses. Add in the higher-than-peer yield and solid history of dividend increases, and there's a lot to like.
However, the REIT has a material debt load. It isn't out of line with peers when you look at financial debt-to-equity and financial debt-to-EBITDA (earnings before interest, taxes, depreciation, and amortization). Still, given its small size, the company doesn't have the same access to capital as the industry giants with which it competes. That's not a signal to avoid the stock, but it is an issue that investors need to keep in mind.
Indeed, there are benefits to CoreSite's small size, but there are negatives as well. It could be a headwind if the capital markets tighten up at a time when the REIT needs some cash. Like the dividend payout ratio, however, leverage should become less of an issue as CoreSite leases out more empty space.
The Millionacres bottom line: A worthy option
The data center arena is hot today as companies increasingly look to move to the cloud. If you are looking for a way to play the industry's expected growth while still collecting a decent dividend, CoreSite looks like it could be a good name for you. Its focus on higher-margin business and the extra capacity it has to lease out today are notable positives.
And while the high payout ratio and leverage need to be monitored, they really relate to growth spending that has already taken place but has not yet had a chance to show up in financial results. So, they shouldn't be considered massive negatives. All in, CoreSite looks fairly attractive as the high-yield play in the data center niche.