CoreSite Realty Corporation is a US$5.0b mid-cap, real estate investment trust (REIT) based in Denver, United States. REITs are basically a portfolio of income-producing real estate investments, which are owned and operated by management of that trust company. They have to meet certain requirements in order to become a REIT, meaning they should be analyzed a different way. I’ll take you through some of the key metrics you should use in order to properly assess COR.
REIT investors should be familiar with the term Fund from Operations (FFO) – a REIT’s main source of cash flow from its day-to-day business activities. FFO is a higher quality measure of earnings because it takes out the impact of non-recurring sales and non-cash items such as depreciation. These items can distort the bottom line and not necessarily reflective of COR’s daily operations. For COR, its FFO of US$209m makes up 68% of its gross profit, which means the majority of its earnings are high-quality and recurring.
In order to understand whether COR has a healthy balance sheet, we have to look at a metric called FFO-to-total debt. This tells us how long it will take COR to pay off its debt using its income from its main business activities, and gives us an insight into COR’s ability to service its borrowings. With a ratio of 22%, the credit rating agency Standard & Poor would consider this as aggressive risk. This would take COR 4.49 years to pay off using operating income alone. Given that long-term debt is a multi-year commitment this is not unusual, however, the longer it takes for a company to pay back debt, the higher the risk associated with that company.
Next, interest coverage ratio shows how many times COR’s earnings can cover its annual interest payments. Usually the ratio is calculated using EBIT, but for REITs, it’s better to use FFO divided by net interest. This is similar to the above concept, but looks at the nearer-term obligations. With an interest coverage ratio of 8.67x, it’s safe to say COR is generating an appropriate amount of cash from its borrowings.
In terms of valuing COR, FFO can also be used as a form of relative valuation. Instead of the P/E ratio, P/FFO is used instead, which is very common for REIT stocks. COR’s price-to-FFO is 24.16x, compared to the long-term industry average of 16.5x, meaning that it is overvalued.
In this article, I’ve taken a look at Funds from Operations using various metrics, but it is certainly not sufficient to derive an investment decision based on this value alone. CoreSite Realty can bring about diversification for your portfolio, but before you decide to invest, take a look at the other aspects you must consider before investing:
- Future Outlook: What are well-informed industry analysts predicting for COR’s future growth? Take a look at our free research report of analyst consensus for COR’s outlook.
- Valuation: What is COR worth today? Is the stock undervalued, even when its growth outlook is factored into its intrinsic value? The intrinsic value infographic in our free research report helps visualize whether COR is currently mispriced by the market.
- Other High-Performing Stocks: Are there other stocks that provide better prospects with proven track records? Explore our free list of these great stocks here.
To help readers see past the short term volatility of the financial market, we aim to bring you a long-term focused research analysis purely driven by fundamental data. Note that our analysis does not factor in the latest price-sensitive company announcements.
The author is an independent contributor and at the time of publication had no position in the stocks mentioned. For errors that warrant correction please contact the editor at email@example.com.