By: Dividend Sensei
Real Estate Investment Trusts or REITs have historically proven to be the best way to profit from real estate. More importantly over the past 45 years they’ve shown themselves to be great ways to generate not just generous, safe and steadily growing income, but also market beating returns as well.
But while many investors think of REITs as slow growing high-yield stocks, there are actually 12 seperate REIT industries, ranging from slow growing mall REITs to hyper growth telecom towers and data center REITs. Data center REITs have been one of the hottest REIT industries over the past few years, generating 26% and 28% total returns in 2016 and 2017, respectively. CoreSite Realty (COR) is one of my favorite data center REITs, thanks to its smaller size allowing it to generate even better long-term total returns.
Yet despite its impressive run since its 2010 IPO, I still consider CoreSite to be a great long-term investment. That’s because it’s slightly undervalued today and so likely to generate about 18% annualized total returns over the coming decade. So let’s take a look at this little known hyper growth REIT to see why it has the ability to more than quadruple your money over the coming 10 years, and potentially deliver three to four times better returns than the S&P 500.
CoreSite Realty: A Hyper Growth REIT With A Long Growth Runway
CoreSite was founded in 2001 but IPOd as a REIT in 2010. The REIT specializes in data centers, serving the fast growing needs of the IT world’s rapid adoption of cloud computing. COR owns 21 data centers in 8 US cities serving over 1,350 corporate clients. Its data centers are located in America’s largest tech hubs, and its customers include some of the largest multinationals and tech firms in the world. That includes hosting the world’s top five cloud computing providers: Amazon, Microsoft, Google, IBM and Alibaba.
CoreSite is right at the heart of one of the largest secular megatrends in technology. Specifically, the corporate IT world’s switch from storing its hardware onsite, to outsourcing its data needs to the cloud via data centers. In addition the rapid growth of global smartphones, mobile data, video streaming, and the coming transition to 5G telecom networks is expected to drive continued strong exponential growth in data and greatly increase the need for cloud computing storage space. For example analyst firm IDC estimates that just 25% of today’s corporate IT spending is going to cloud computing, a figure that is set to rapidly rise to over 50% by 2020 and continue growing far beyond. As a result cloud computing demand is expected to grow at over 25% annually through at least 2025.
Thanks to this rapid growth in its core market CoreSite is enjoying strong occupancy of 93% in stabilized (completed and rented up) properties and its average lease has 45 months remaining. And thanks to its strong counter parties, the REIT enjoys extremely stable and recurring cash flow to pay its rapidly growing dividend. More importantly its customers are very loyal, with the REIT’s monthly churn rate at just 1.8% (on expiring leases), a figure that has been rapidly dropping in recent years.
This strong demand, occupancy, and low churn rate gives the REIT strong pricing power which is why in its latest quarter it recorded 15.7% revenue growth which translated into 30% growth in adjusted funds from operation or AFFO/share. AFFO is the REIT equivalent of free cash flow and is what funds its dividend. Thanks to its rapid growth CoreSite raised its dividend by 14.4% YOY in the last quarter. That’s among the fastest payout growth rates of any REIT in America, which isn’t surprising given that the REIT has increased its dividend at 32.3% annually over the past five years.
CoreSite’s future growth is primarily going to come from investing in expanded data center storage. The REIT prefers organic growth to acquisitions because the yield on invested capital is far more attractive than buying new properties outright. That’s due to very high data center prices in its target markets. Today COR has $277 million in new data center construction and expansion underway at 11 facilities. To fund this growth the REIT has $377 million in remaining liquidity under its revolving credit lines. And over the long-term the REIT’s enormous growth runway, created by the rise of 5G telecom networks, the internet of things or IOT (including driverless cars), and exponential data growth from artificial intelligence, bodes well for CoreSite’ ability to generate generous and rapidly growing dividends for years and decades to come. That in turn translates to one of the most attractive dividend and total return profiles of any REIT you can buy today.