Coresite: A Tale of Two Industries

It is the best of industries, it is the worst of industries.

Technology and real estate: what an odd combination!  Coresite Realty Corporation (NYSE: COR) owns, acquires, and manages data centers.  These warehouses of data centers rent server farms to some of the world’s largest network and cloud providers.  Although Coresite mainly facilitates technology based services, the company owns around 2.8 million net rentable feet.

However, just because they have so much space to rent, COR is classified as a Real Estate Investment Trust (REIT).

Technology stocks historically have brought forth more risk.  Investors often pay a premium for new companies that possess the possibility to someday be the next Amazon or Google.  A newly found fad with investors involves the cloud.  The cloud allows for people to combine desktops, laptop, emails, and other functions into one location, accessible at any time or place.  The cloud is computing over the internet; therefore, the cloud is everything.

For typical cloud companies, their sophisticated equipment hubs require extensive startup capital.  There is also the issue of employing technicians and security personnel to maintain cloud efficiency.  Further, companies like Google or Facebook house a lot of private information.  A breach in personal information would be devastating to public relations and consumer confidence, so many big named companies still are apprehensive about completely switching their networks to the cloud.

However, Coresite has been able to capitalize on the cloud industry, developing what’s called an “Open Cloud Exchange.” Basically, this exchange allows for companies to connect virtually with secure and direct cloud server access.  Another perk is Coresite’s “Any2 Exchange.”  This is basically a link between internet service providers and content networks.  These exchanges have allowed the company to to lock in well-known and profitable customers such as: Facebook, Microsoft, Amazon, and Google.

This hot new way of doing business and accessing information pushed for over $70B in revenue last year alone.  Over the last five years, the ISE Cloud Computing Index (NYSEArca: SKYY) has seen huge growth rates of over 88%.  Companies around the world want to keep up with changing technology and be a part of the promising future of the cloud.  The internet of things and big data continue to propel industry growth rates, and as cyber security interest expands and tightens, more well-known companies will continue to make the cloud transition.

One of the main growth drivers for COR, however, has been market penetration of REITs not cloud related services.  Real Estate Investment Trusts (REITs) are companies who profit from income-producing real estate.  REITs can be tied to all different aspects of the economy.  Coresite specializes in the data center area of these investments, meaning they rent out space and data center equipment to larger companies.

REITs have become some of the most quickly growing investments.  Adding more space and capabilities to existing locations boosted Coresite to triple digit growth rates over the last five years.  Although company guidance and growth strategies revolve around server farm capabilities, the market prices COR otherwise.

Historically, COR follows the trend of the REITS and the real estate market (NYSEArca: IYR), not cloud indexes.

Although REITS and real estate are only down a fraction of a percent, there has been almost a double digit loss over the last three months.  Coresite has followed this trend, not the positive growth of cloud indexes.  One of the main reasons for the decline in REITS is recent jumps in interest rates.  Historically, REITS and COR perform inversely to 10-Year Treasury rate fluctuations.  REITs are high yielding investments that create high returns from dividends, making them attractive investments to shareholders.  With lower entry costs, liquidity, and interest rates in the past few years being so low, investors have been flocking to throw money into these trusts, hoping to turn a substantial profit.

However, 10-Year Treasury rates have increased over 50% in the last 3 months, putting downward pressure on real estate.  With the Federal Reserve expected to raise rates in the upcoming months, REITs peer far less attractive than bond investments.  This worry has resulted in double digit percentage price drops for Coresite.

Another aspect of worry is the uncertainty of the economy.  Lately, rates have been so low that everyone is taking out mortgages.  But with talks of the real estate and stock market being overheated, a correction could be coming.  In addition, discussions of an almost certain recession have come with the new upcoming presidency.  A recession would decrease the amount of space needed by companies to rent, lowering the value of REITs.

REITs overall, however, have struck some investment firms as a buying opportunity.  Current REITs with negative returns are flocking to discount prices.  With dividends just around the corner, prices have the potential to see an upswing and continue to grow with maturity.  With dividends that just keep growing, these investments are an additional way to diversify a portfolio with tangible assets.

Rising interest rates and an ambiguous economic outlook gives this REIT an uncertain future.

Will Coresite capitalize on ingenuity and a strong presence in the data center sector, or have they already seen their best days in the real estate market?

It may seem that cloud computing is the spring of hope, data center REITs, the winter of despair.

It was the age of technology, it was the age of real estate.

 

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