DENVER, CO—CoreSite Realty recently reported a solid quarter, with leasing volumes above long-term averages and leasing spreads remaining in positive territory. Management maintained 2014 FFO guidance, which implies that COR will record its third consecutive year of double-digit FFO/sh growth.
Trading at a 9.2% implied cap rate, that research firm MLV & Co. believe COR's stock is well below its true value given the in-fill nature of its well-connected portfolio and the significant upside potential from the development pipeline. “We estimate that COR is trading 15% below NAV but believes the company should trade at a premium to NAV given its growth potential and the value of its platform. We maintain our $38 price target and BUY rating,” says the firm.
In the earnings call, Tom Ray, CoreSite's CEO, said that “Our first-quarter results reflect continued execution of our business plan, with total operating revenues and adjusted EBITDA increasing 16% and 21% year over year, respectively.”
He explained that “Importantly, we recorded an increase in new and expansion sales, with 131 new and expansion leases executed representing $5.1 million in annualized GAAP rent. This represents a 48% increase over the prior quarter and a 12% increase over the trailing-year quarterly average. In addition, we increased the number of quota-bearing sales reps across our platform by 21%, reflecting progress against our goal to increase in-place quota coverage by approximately 35% over the course of 2014.”
According to MLV analyst Jonathan Petersen, his firm's COR thesis is driven by the following: 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 the smallest company under our coverage, COR has the opportunity to grow more rapidly through development than its peers; and the company trades at a discount to Digital Realty Trust and private market transactions.
What would concern Peterson's team is that “G&A costs are high relative to peers due to the smaller relative size of the company and the large sales force that the business model requires; and Carlyle owns about 50% of the company, which creates an equity overhang on the stock.”
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