Tripling A 4% Data Center Dividend With Options: CoreSite Realty

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We last covered CoreSite Realty (COR) in an April 2020 article, shortly after the market bottom in late March. We noted then that COR had outperformed the S&P 500 during the most recent three pullbacks.

Although COR has outperformed the S&P so far in 2020, it has lagged it and the Technology Select Sector SPDR Fund, XLK, and the Nasdaq 100 ETF, QQQ, over the past quarter, half year and year.

However, it has outperformed all of them in the past month:

Profile:

CoreSite Realty delivers secure, reliable, high-performance data center, cloud and interconnection solutions to a growing customer ecosystem across eight key North American markets. More than 1,350 of the world’s leading enterprises, network operators, cloud providers, and supporting service providers choose CoreSite to connect, protect and optimize their performance-sensitive data, applications and computing workloads. (COR site)

COR’s data center assets are in major US metro areas and service many large customers, such as IBM, Amazon Web Services – AWS, Microsoft Azure, among many others:

(COR site)

Earnings:

2019 was a bit of a “meh” year for growth for COR, with FFO only rising 1.18%, and EBITDA up 4%. Management did give a hefty raise to the dividends/share though, increasing it by 15%.

Looking back at the first half of 2020 shows COR actually doing better in the COVID era, with FFO up 5.14%, EBITDA up 6%, and revenue up 5.72%. Dividends/share rose 5.17%, awhile the share count rose ~6%:

DOR signed 229 new leases in Q1-2 2020, albeit at a lower rate of $190, vs. $197 in 2019. Its Retail Churn rate was much lower, at 4.3%, vs. 11.1% in 2019.

The company also commenced 233 leases, which is slower than its full year 2019 rate of 519, as is the amount of annualized rent and square footage, while the $194 rate was very similar to the $195 achieved in 2019.

The drop in new and commenced leases is most likely a by-product of economic lockdowns and ongoing uncertainty, which would make the logistics and economics of signing and commencing new leases a bit more challenging.

(COR site)

Guidance:

Management increased full-year 2020 net income/share guidance to a range of $1.81 – $1.91, vs. its previous guidance of $1.74 – $1.84 issued in early 2020. They also bumped up full year FFO/share by a nickel, to $5.15 – $5.25, vs. its previous guidance of $5.10 – $5.20.

(COR site)

Financials:

COR’s relatively small equity amount cuts both ways – it has an outsized ROE of nearly 55%, but its debt/equity also is very high, at 13.87. Its net debt/trailing EBITDA of 5.74X is at the high end of the range of ~3+ to 6X for data center stocks, while its EBITDA margin is in line.

Debt and Liquidity:

COR’s next major maturity is in 2022, when $200M in senior unsecured loans come due.

(COR site)

As of 6/30/20, COR had liquidity of $347.6M, which compares favorably with its remaining construction costs of $65.64M:

(COR site)

Management issued $150M in unsecured notes in May and July. Using Annualized EBITDA shows a lower leverage figure of 5X:

(COR site)

Valuations:

COR’s low equity amount also pumps up its price/book valuation – no joy on the undervalued front, which is hardly surprising for a data center stock – they’ve been on a roll for quite awhile.

Analysts’ Targets:

At its 10/15/20 closing price of $126.81, COR is only 2.37% below analysts’ average price target of $129.81.

Dividends:

COR pays $1.22/quarter, and should go ex-dividend again in late December, with a mid-January 2021 pay date. At $126.81, the dividend yield is 3.85%.

Options:

As we’ve mentioned in many of our previous articles, tech stocks aren’t known for paying generous dividends. However, if you’re looking to improve upon a lower yield in a short-term time frame, selling options can help you in that pursuit.

Covered Calls:

With the average price target at $129.81, we took a look at COR’s January $130.00 call strike. It has a bid of $3.70, over 3X COR’s quarterly dividend.

In a static scenario,your profit would be $4.92, a combo of the $1.22 in dividend $ and the $3.22 option bid, for a nominal return of 3.88% in ~3 months, or 15.56% annualized.

If your shares get assigned prior to the December ex-dividend date, your total return would be $6.89, a $3.19 capital gain, plus the $3.70 in option money.

If your shares were to get assigned after the December ex-dividend date, your total return would be $8.11, comprised of the dividend money, the capital gain, and, as always, the call option money. The nominal return would be 6.4% in ~3 months, or 25.65% annualized.

NOTE: We use annualized yields in our options tables so that users can compare trades of varying lengths of time.

Cash Secured Puts:

If you’re skeptical about buying COR at a price that’s only 2.37% below the average price target, selling cash secured puts below COR’s price/share can offer you a lower entry price.

COR’s January $125.00 put strike has a much higher bid of $5.50 than its $130 call strike does. This offers you a breakeven of $119.50, which is ~8% below the $129.81 average price target.

NOTE: Put sellers don’t receive dividends – we list the dividends on our Cash Secured Puts Table so that users can compare them to the options premiums for each trade.

You can see more details for both of these trades on our Covered Calls and Cash Secured Puts tables.

All tables by DoubleDividendStocks.com, except where noted otherwise.

Disclosure: I/we have no positions in any stocks mentioned, but may initiate a long position in COR over the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.

Additional disclosure: Our DoubleDividendStocks.com service has featured options selling for dividend stocks for over 11 years.

It’s a separate service from our Seeking Alpha Hidden Dividend Stocks Plus service.

Disclaimer: This article was written for informational purposes only, and is not intended as personal investment advice. Please practice due diligence before investing in any investment vehicle mentioned in this article.