It's probably obvious to everyone at this point that the internet is pretty important. That said, most internet stocks are growth-oriented affairs, which can leave income investors out in the cold. CoreSite Realty (NYSE: COR), however, is an internet stock that offers a huge 4.1% dividend yield. Here's why this relatively boring real estate investment trust (REIT) is a good choice for dividend investors looking to add some internet flare to their portfolios.
Leading the pack in an important way
CoreSite owns data centers, but it is not the largest player in the sector. That distinction goes to Equinix and its roughly $66 billion market cap. That's multiple times larger than CoreSite, which sports a market cap of roughly $5 billion. However, CoreSite does stand above the pack when it comes to dividend yield, where its roughly 4.1% yield is a full percentage point higher than peer QTS Realty and much more generous than the around 1.6% yield on offer from Equinix.
That makes CoreSite the high-yield way to invest in data centers. But there's more to the dividend story here than meets the eye. The real estate investment trust has increased its dividend annually for 11 consecutive years, so there's a material dividend history here and it's pretty good. In fact, the REIT just upped the dividend again in the second quarter.
That hike, however, is notable in a not so good way, because using the second-quarter dividend as a run rate leads to an annualized dividate rate of $5.08 per share. The midpoint of the company's funds from operations (FFO) guidance range for 2021 is $5.47 per share, and it results in an FFO payout ratio of nearly 93%. That's high, but clearly the REIT is comfortable enough with the level to keep increasing its payout. Why?
A good business that's getting better
One of the reasons for this confidence is that its business is diversified and sticky. At the end of the first quarter, CoreSite had nearly 1,400 customers across its 25 data centers. The churn rate in the quarter was 0.8%, meaning customers are sticking around. It renewed 276 leases with an average cash rent increase of 2.3%. The REIT also signed 130 new leases in the quarter.
That last point is notable because its facilities are not fully leased out. The company breaks its data centers down into two categories: stabilized and pre-stabilized. Its stabilized business was 87.5% occupied at the end of the first quarter, while its pre-stabilized facilities were just 39.2% occupied. That means CoreSite has room for growth in its portfolio as it continues to lease up its pre-stabilized assets. In addition to that, it is building new properties and has expansion projects that it could undertake at existing assets if -- perhaps it would be better to say when -- needed. In other words, the current payout ratio may not be fully reflective of the dividend the company can support over the long term.
Notably, around 45% of CoreSite's annualized rent comes from leases with smaller customers or co-location deals. These tend to be stickier deals with higher margins than deals with larger customers like an Amazon.com or Alphabet, which can demand lower rates and threaten to move if it doesn't get them. Roughly 92% of CoreSites leases fall into the co-location and small-scale categories, so it has a pretty stable foundation where the loss of any single customer won't have a material impact on the overall operation.
Meanwhile, CoreSite's financial debt to equity ratio, at 0.35 times, is roughly in line with its peers. To be fair, Equinix's 0.18 suggests it has a much stronger balance sheet, but it doesn't appear that CoreSite will have any trouble tapping the capital markets as it looks to keep expanding in what is highly likely to be an expanding industry.
Worth a deep dive
Is CoreSite somehow better than any of its peers? No, not really. In fact, you could easily argue that the big players in the sector, Equinix and Digital Realty, are better companies than CoreSite in many ways (size often infers advantages). However, if you're a dividend investor looking to maximize the income your portfolio generates, CoreSite appears to be a solid REIT with a sector-niche leading yield and ongoing growth potential. It's not perfect, but for the right investor it is worth a very close look.