CoreSite Realty Corp.

Transcription

1 1 CoreSite Realty Corp. Finance & Investment Club Real Estate Sector Spring 2017 Senior Analyst: Alex Hall Junior Analysts: Emanuel Andrade, Aaron Yong, Xander Mojarrab, James Alperin

2 Agenda 2 Sub-Industry Definition Recommendation Firm Overview Revenue Generation Industry Trends Firm Specific Trends Risk Factors Valuation Recommendation Summary

3 3 Industry Definition This sub- industry consists of specialized REITs that focus on digital infrastructure which provides the ability to store and exchange data through a centralized communication system. For example, data centers and telecom equipment enable the storage and 24-7 access of information. To qualify as an REIT, a company or trust must distribute 90% of their taxable income to shareholders annually in the form of dividends By law, at least 75% of a REIT s assets must be invested in real estate, cash or Treasuries and 75% of gross income must be from real estate Income is largely generated from rent, interest and capital gains Hybrid sub- industry of tech and REITs American Tower Corp. NYSE: AMT Mkt Cap: 47.33B Equinix Inc. NASDAQ: EQIX Mkt Cap: 26.10B Digital Realty Trust Inc. NYSE: DLR Mkt Cap: 15.26B Iron Mountain Inc. NYSE: IRM Mkt Cap: 8.3B Communications Sales & Leasing Inc. NASDAQ: CSAL Mkt Cap: 4.0B CyrusOne Inc. NASDAQ: CONE Mkt Cap: 4.15B CoreSite Realty Corp NYSE: COR Mkt Cap: 3.1B DuPont Fabros Technology Inc. NYSE: DFT Mkt Cap: 3.20B QTS Realty Trust Inc. NYSE: QTS Mkt Cap: 2.62B

4 4 Recommendation Summary- CoreSite Realty Corp (COR) Current: $92.71 ( ) Target Price: $ Position: BUY Upside: 16.7% Expanding in Demand Markets to Drive Revenue Increasing Interconnection in Facilities will drive demand Management Focus on Cost Control

5 5 CoreSite Realty Corp (COR) NYSE: COR Mkt Cap: 3.1B Brief overview: Founded in 2010 HQ: Denver, CO Operates 20 data centers in 8 locations in the US Heavy presence in Los Angeles and Northern Virginia developing tech markets 20% Revenue growth ( ) High occupancy rate of 80-90% in all facilities CEO: Paul Szurek Experience: 1. Director of two REITs 2. Director of Fed Bank of Richmond CFO: Jeff Finnin Experience: 1. Partner with KPMG and Arthur Anderson SVP Operation: Dominic Tobin Experience: years of experience with AT&T CoreSite Realty Corporation engages in the ownership, acquisition, construction, and management of data centers

6 6 Revenue Generation Year Rental Revenue Interconnection revenue Power Revenues Office, Light Industrial & other % 10% 26% 4% % 12% 25% 3% % 13% 26% 3% % 13% 27% 2% % 13% 28% 2% *% of Total Revenue Key Takeaway: More than 50% of revenue comes from rental revenue but the other half comes from CoreSite s efforts of expanding service solutions such as interconnection and power options to clients

7 Industry Trends 7 Increasing data usage and traffic Growth of cloud computing and cloud services Global digitalization (IoT) Future tax cuts leading to increase in Capex of clients Increase in outsourcing of data solutions to 3 rd party cloud providers

8 8 Growth of Digital infrastructure investments and Relevance Increase use of digital infrastructure in businesses (cloud computing, M2MC, IoT) Growing importance of data analytics and the result of big data has benefited this industry Annual global data center traffic (4.7ZB-15.3ZB) (Graph.A) Cloud IT infrastructure spending will grow at CAGR of 15.1% ( ) By 2020, cloud IT infrastructure spending will be 50% of total expenditures on enterprise IT infrastructure. Graph A. Importance of data analytics in businesses will drive the growth of this industry as more money is invested into cloud IT infrastructure

9 Trends Driving CoreSite Valuation 9 Expanding in Demand Markets to Drive Revenue Increasing Interconnection in Facilities Management Focus on Cost Control

10 10 Trend #1: CoreSite s Expansion in Demand Markets to Drive Revenue Actively Seeking Acquisition and Development Opportunities in New and Existing Markets - Increasing cash flow of in-place data center space through active management % of leasable space still available to capitalize Recent acquisition: - Purchased $60M in land to expand Reston campus and expects to spend another $90M on the first phase of development (Plan total of $500M) (Dec 2016) - Strategically develop space in incremental phases to meet customer demand - Plan to increase total operating NRSF by 16.68% which will increase rental revenue 40.79% once all of the developmental NRSF are occupied As CoreSite increases its lease capacity through investing in more PPE, it will drive revenue growth Market/Facilities Developmental NRSF Market % Now Market % Post Expansion San Francisco Bay % 24.17% Los Angeles 137, % 17.84% North Virginia 611, % 33.30% Chicago % 5.54% Boston 73, % 7.88% New York 134, % 8.84% Miami 13, % 1.35% Denver 23, % 1.08%

11 CoreSite Increasing Leverage to Support Growth 11 CoreSite took advantage of low- interest rates environment and Long Term Debt ( ) increased leverage position for the past 5- yrs Cost of borrowing average of 3.07% which is relatively lower compared to current interest rates Long- term debt growing at CAGR of % 59.8 Long-term debt will help fund CoreSite s stategy of revenue growth through calculated expansion LONG-TERM DEBY (MILLIONS) YEARS

12 Trends Driving CoreSite Valuation 12 Expanding in Demand Markets to Drive Revenue Increasing Interconnection in Facilities Management Focus on Cost Control

13 13 Trend #2: Increasing Interconnection in CoreSite Facilities Drives Demand Network Effect of Data Centers As more customers locate in data center facilities, it benefits their business partners and customers to collocate with CoreSite Benefit to gain the full economic and performance perks of interconnection services Increases the volume of interconnection services which saves energy costs due to economies of scale Example: MLB s system s capacity has grown approximately 25% every year in terms of ingesting, processing, editing, and storing media Stores with CoreSite to develop systems with scalable capacity and capabilities Stores Adobe software in CoreSite data centers to increase processing speed and storage space Ecosystem of customers continues to drive new and existing customer growth

14 Trends Driving CoreSite Valuation 14 Expanding in Demand Markets to Drive Revenue Increasing Interconnection in Facilities Global Management Digitalization (Internet Focus on of Cost Things) Control

15 15 Trend #3: Strong Management Focus on Cost Control to Increase Margins CoreSite Profit Margins and COGS ( *) 80.00% 56.84% 60.55% 62.07% 63.04% 63.95% 64.84% 65.70% 66.10% 66.60% 66.60% 70.00% 60.00% - Paul Szurek is the President and Chief Executive Officer has the ongoing goal of sustainable profitable growth % Chnage 50.00% 40.00% 30.00% 20.00% 10.00% 43.16% 39.45% 37.93% 36.96% 36.06% 35.16% 34.30% 33.90% 33.46% 33.40% - Under past CEO, Tom Ray s leadership CoreSite has lowered its COGS and increased its profit margins ( ) 0.00% Years Profit Margins COGS * based on projections Steady profit margin growth and decline in COGS contributes to the success of CoreSite

16 How CoreSite could continue to increase margins? 16 New Energy Efficient Facilities/ Equipment Strategic Expansion in Demand Markets Current Leverage Strategy Management Effectiveness CONE DFT COR Average Return on Assets (%) Return on Equity (%) Return on Investment (%) Sales per Employee $1.26M $4.45M $1.88M 2.53 Profitability CONE DFT COR Average Gross Profit Margin (%) Operating Profit Margin (%) Net Profit Margin (%) Cash Flow Margin (%) Enterprise Value $5.25B $5.57B $5.02B

17 CoreSite Risk Factors Increasing interest rates Cybersecurity Technological Shifts High Payout Ratio Long Sales Cycle Increase activity in insider trading 17

18 Comparable Companies Valuation 18 P/FFO EV/EBITDA Methods Weight CoreSite Multiple Mean Multiple 17.7x 19.4x 20.6x 26.3x P/FFO 35% EV/EBITDA 35%

19 Discounted Cash Flow Valuation 19 DCF Methods Weight Perpetuity Growth 15% Exit Multiple 15%

20 20 Recommendation Summary- CoreSite Realty Corp (COR) Increasing data usage and traffic Current: $92.71 ( ) Target Price: $ Position: BUY Upside: 16.4% Growth of cloud computing and cloud services Increasing Interconnection in Facilities will drive demand Expanding in Demand Markets to Drive Revenue Management Focus on Cost Control Global digitalization (IoT) Future tax cuts leading to increase in CapEx Increase in outsourcing of data solutions to 3 rd party cloud providers

21 Appendix 21

22 Income Statement 22

23 Income Statement 23

24 Balance Sheet 24

25 Balance Sheet 25

26 Statement of Cash Flows 26

27 Sources International Data Corp: 2. World Economic Forum: ort_2014.pdf 3. REITs: magazine/march- april- 2016/infrastructure- reits- are- powering- growth- cloud- computing 4. IBIS World: 5. CoreSite Realty Corp. 10K 6. Key Data Center Trends: Key- Trends- Influencing- Data- Centers- in- 2016/ 7. The Henry Fund Research: HenryFund.org