CoreSite Realty Corp: Will This Data Center Stock Double Again?
A Soaring Ticker Most People Have Never Heard of
In this day and age, it’s not an exaggeration to say that data centers are the new gold mines.
Many companies have been shifting their data to external systems. Even in highly regulated industries like finance and healthcare, companies that run their own in-house data centers have started running data centers in warehouse-sized spaces leased from third-party data center facilities known as colocation centers.
According to CBRE Group Inc (NYSE:CBRE), U.S. businesses paid for a record-high 396.4 megawatts of power in the country’s largest data center markets in 2019, marking a 33% increase year-over-year. (Source: “CBRE Report: U.S. Data Center Market Sees Record Leasing and Construction Activity in 2019,” CBRE Group Inc, February 26, 2020.)
One company that has been capitalizing on this soaring demand for cloud services is CoreSite Realty Corp (NYSE:COR), a real estate investment trust (REIT) headquartered in Denver, Colorado.
Now, I know what you’re thinking: REITs are basically landlords, and many of them have been around for decades. How can a REIT benefit from the booming cloud industry?
Well, the secret lies in CoreSite Realty Corp’s specialization. Instead of owning malls, apartments, or office buildings, this REIT invests in data centers. As of December 31, 2019, the company had 23 operational data centers across eight key North American markets. (Source: “Q4 2019 Investor Presentation Februry 2020,” CoreSite Realty Corp, last accessed March 4, 2020.)
With these data centers, CoreSite serves more than 1,350 customers, including enterprises, network operators, cloud providers, and supporting service providers.
To see why this company is special, all you need to do is take a look at its stock chart. Usually, REITs are known as relatively boring businesses, yet over the past five years, CoreSite stock has skyrocketed more than 130%.
CoreSite Realty Corp (NYSE:COR) Stock Chart
Chart courtesy of StockCharts.com
As you’d expect, business has been booming at this data center company. In the fourth quarter of 2019, CoreSite Realty generated $146.0 million of operating revenue, representing a five percent increase from 2018. (Source: “CoreSite Reports Fourth Quarter 2019 Financial Results,” CoreSite Realty Corp, February 6, 2020.)
Funds from operations, a critical measure of a REIT’s performance, grew 3.2% year-over-year to $1.30 per diluted share.
During the quarter, CoreSite Realty started 130 new and expansion leases for 86,187 net rentable square feet. These leases are expected to contribute $16.6 million to the company’s annualized rent.
At the same time, CoreSite Realty managed to build up quite a bit of a backlog—leases that are signed but not yet commenced. At the end of 2019, the company’s data center sales backlog totaled $15.6 million on a generally accepted accounting principles (GAAP) basis and $19.8 million on a cash basis. (Source: “Q4 2019 Investor Presentation Februry 2020,” CoreSite Realty Corp, op. cit.)
The REIT also has a development pipeline that, once completed, will deliver new capacity to support continued growth.
Right now, CoreSite Realty Corp has ground-up developments in Chicago and Los Angeles, as well as data center expansion projects in New York and Santa Clara. Added up, these projects are expected to deliver 196,000 of net rentable square feet of turnkey data center capacity in 2020.
Of course, as is the case with all stocks, there’s no guarantee that COR stock will keep trending up. Even though the company is well positioned to grow its business in the data center market, CoreSite stock can still have its ups and downs.
And that’s where the company’s REIT status can come to the rescue. You see, while growth investors don’t always care much about real estate, REITs are pass-through entities that are required by law to distribute at least 90% of their profits to investors in the form of dividends. In return, they pay little to no tax at the corporate level.
At CoreSite Realty Corp, the company currently pays investors $1.22 per share on a quarterly basis. With COR stock trading at $110.83 per share, that quarterly rate comes out to an annual yield of 4.4%.
This is a return that shareholders can expect to get no matter where the CoreSite stock price is going.
At the time of this writing, the U.S. stock market is experiencing a sizable correction. Many tickers, including some of the biggest cloud service providers, are being heavily sold off.
Nevertheless, the outlook for the data center market remains as bright as ever, and CoreSite Realty Corp stands ready to keep monetizing the booming demand for cloud services.
COR stock has more than doubled over the past five years. Given the growth potential of the company’s business and its generous dividend policy, more returns are likely on the way for CoreSite stock investors.