CoreSite Realty (NYSE: COR), a data center operator with a market capitalization of $8.0bn+ and an enterprise value of $9.8bn+, has been named in press reports from Reuters noting that it is potentially for sale and is “working with an investment bank to explore its options after attracting acquisition interest” from American Tower (NYSE: AMT), Digital Realty (NYSE: DLR), and private equity firms. With the company possibly up for sale, we provide an overview of the business and a breakdown of what makes CoreSite an attractive data center operator, as well as how CoreSite fits into the strategies of its potential suitors.

CoreSite Realty – Data Center Business for Sale

CoreSite Realty operates 25 data centers, representing 250+ megawatts of power capacity in locations throughout the United States. In aggregate, these data center facilities comprise 3.2 million net rentable sqft (NRSF).

CoreSite provides colocation services and 32k+ interconnections in 8 U.S. markets. As shown below, the company’s data centers are located in Silicon Valley (San Francisco Bay Area), Los Angeles, Northern Virginia, New York, Chicago, Boston, Denver, and Miami.

CoreSite Realty Data Center Map

Through these data centers, CoreSite supports over 1,370 customers, which includes enterprises, cloud service providers, and network operators.

Financial Performance in Q3 2021

In Q3 2021, CoreSite reported revenue of $164m, a 1.1% increase quarter-over-quarter, and adjusted EBITDA of $85.7m, decreasing 2.0% quarter-over-quarter. As a result, the company’s EBITDA margin declined by 1.6%, from 53.9% in Q2 2021 to 52.3% in Q3 2021.

Full-Year 2021 Guidance

For full-year 2021, CoreSite projects revenue of $645m to $653m ($649m at the mid-point). Additionally, the company forecasts adjusted EBITDA of $340m to $348m ($344m at the mid-point). Finally, the mid-point of the company’s guidance implies a year-over-year increase of 7.0% and 6.0% in revenue and EBITDA, respectively.

What Makes CoreSite Particularly Attractive?

CoreSite’s data centers are interconnection hubs located in the Tier-1 markets of the United States. For example, the company’s Los Angeles (LA1) One Wilshire facility is one of the most densely interconnected data centers globally, bringing together an ecosystem of 670+ organizations, including 330+ networks.

Overall, the company’s three largest markets of Silicon Valley, Los Angeles, and Northern Virginia comprise ~80% of CoreSite’s annualized data center rent. Within Silicon Valley, CoreSite’s sizeable presence in Santa Clara is especially unique as it is a market with strong demand characteristics coupled with constraints on supplyparticularly because it is difficult to assemble land and power in the area.

Increasingly, interconnection hubs are becoming fundamental to cloud service providers and network operators. While Equinix is the dominant interconnection provider in many of CoreSite’s markets (e.g., Silicon Valley and Northern Virginia), there remains value in being an alternative. Indeed, CoreSite offers diversity for cloud service provider on-ramps, as well as for the connectivity needs of network operators. Therefore, CoreSite’s value proposition is evident on a standalone basis, as well as for potential scaled acquirers that ultimately want to better compete with Equinix in interconnection (see below).

Finally, CoreSite has embedded lease-up and expansion potential. To this end, CoreSite has 30+ megawatts of power capacity available to lease and is developing a further 10 megawatts. Importantly, this capacity resides in CoreSite’s Tier-1 markets of Silicon Valley, Los Angeles, and New York.

How Does CoreSite Fit With its Potential Suitors?

Press reports have named American Tower, Digital Realty, and private equity firms as potential acquirers of CoreSite. As such, we briefly review how CoreSite Realty being ‘for sale’ may fit into each party’s strategy.

American Tower

American Tower owns a portfolio of 9 colocation data centers, including 6 edge and 3 metro facilities in the U.S. Recently, American Tower accelerated its data center strategy by purchasing DataSite in October 2021 for $201m. Read more about American Tower’s data center strategy here.

While not a traditional data center operator, American Tower’s strategic focus and size makes it a credible buyer for CoreSite. Specifically, American Tower has a market capitalization of $125bn+ and an enterprise value of $160bn+.

Digital Realty

Digital Realty has shown its commitment to growing its interconnection business through its recent acquisitions of Interxion and the remainder of the Westin Building in Seattle. Presently, in the United States, Digital Realty operates key connectivity sites at 60 Hudson (New York), 111 8th Ave (New York), 56 Marietta (Atlanta), 350 E Cermak (Chicago), 600 W 7th St (Los Angeles), and the Westin Building (Seattle).

An acquisition of CoreSite would significantly strengthen Digital Realty’s interconnection presence in the United States. In turn, Digital Realty, alongside Interxion’s European interconnection strength, would be a formidable competitor seeking to gain share from Equinix.

Private Equity

CoreSite’s roots began in the year 2000 with private equity capital from the Carlyle Group. More recently, private equity suitors that have been active in the data center sector include Brookfield Infrastructure, DigitalBridge, EQT Infrastructure, IPI Partners, I Squared Capital, KKR Infrastructure, Macquarie, and Stonepeak Infrastructure.

Each of these private equity firms have existing data center businesses which could be combined with CoreSite. Specifically, these data center operators include DataBank, Cologix, Netrality Data Centers, and EdgeConneX, amongst others.

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