Is CoreSite Realty A Top Data Center REIT? 1 Analyst Weighs In
According to a research note released by MLV & Co. on February 13, there was plenty to cheer about from data center REIT CoreSite Realty Corp (NYSE: COR)'s recent Q4 2014 earnings call.
An exuberant Mr. Market seemed to agree, as CorSite spiked to an all-time high of $49.18, before COR shares closed up 2.3 percent at $48.08, a new 52-week high.
Robust Guidance For 2015
According to MLV, CoreSite reported, yet another quarterly FFO/share beat in 4Q14, and followed it through with the introduction of 2015 guidance that was 6 percent above the consensus expectation at the midpoint.
Strong Q4 Leasing & FFO Beat
- COR reported 4Q14 Core FFO/share of $0.61, which was ahead of MLV's estimate of $0.56 and consensus of $0.57. The beat was primarily due to higher NOI (+0.03/share), and lower G&A (+0.02/share).
- COR signed 91,662 sf of new/expansion TKD leases for annualized GAAP revenue of $11.1M, which compares to 3Q14 revenue of $7.6M and 2Q14 revenue of $9.4M.
- In 4Q14, COR signed 43,863 sf of renewal leases at a cash leasing spread of +2.6 percent. The 4Q14 spread is slightly down from the 3Q14 spread of +3.0 percent and up from the 2Q14 spread of +2.1 percent.
- On a GAAP basis, leasing spreads were +5.2 percent, compared to +10.6 percent in 3Q14 and +8.1 percent in 2Q14. The average rent on renewals signed in 4Q14 was $153/sf, which is in line with the average of the past two years. Overall, leasing spreads continue to remain steady and positive, which highlights the strength of the colocation data center business.
MLV & Co. Latest FFO Model - CoreSite
The new MLV FFO per share base case 2015/2016 FFO estimates are $2.62 and $3.06, from $2.48 and $2.78, respectively.
Valuation & Assumptions
Following the quarter, MLV increased its price target to $53, from $51 and maintained its BUY rating. MLV applied a 10 percent premium to its NAV to reflect a portfolio premium and management quality. The firm assumed a 7.50 percent cap rate, which it believes is at the high end of private market transactions, which range from 7 percent to 8 percent.
MLV & Co. Investment Thesis
- The company's focus on connecting its data centers to multiple networks and exchanges will attract customers that need data center space for their "performance-sensitive" applications—these tenants are more likely to renew and pay premium rents;
- As one of the smallest companies under MLV coverage, COR has the opportunity to grow more rapidly through development than its peers;
- CorSite's in-place dividend yield of 3.6 percent is well covered at a year-to-date AFFO payout ratio of 80.7 percent;
- The company has the ability to increase FFO substantially by increasing leverage, which is currently low at 16 percent Net Debt and Preferred-to-EV and 3.01x Net Debt and Preferred-to EBITDA.
Potential CoreSite Risk Factors
- Deterioration in rent and occupancy levels driven by increased levels of competitive supply or deteriorating demand would likely negatively impact valuation and investor sentiment.
- Secondary offerings are possible and often result in earnings dilution, as REITs must distribute 90 percent of taxable income to shareholders by law.
- Expense pressure could cause NOI results to lag investor expectations.
- Development delays or cost overruns could materially impact near-term investor expectations.
- Carlyle's ownership of about 50 percent of COR's stock creates an equity overhang.
Image credit: CERN, CC
Latest Ratings for COR
|Dec 2016||KeyBanc||Upgrades||Sector Weight||Overweight|
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