Data Center REIT CyrusOne Jefferies Conference - Key Takeaways

On May 12, data center CyrusOne Inc CONE CFO Kim Sheehy presented at the Jefferies 2015 Global Technology, Media and Telecom conference. CyrusOne owns and operates 27 data center facilities, containing 1.3 million SF, located in eight U.S. markets, London and Singapore. CyrusOne is focused on the enterprise market and counts 146 Fortune 1000 companies, including 9 Fortune 20 firms, among its current customer base of 680. Sheehy discussed how in 45 to 60 days, CONE expects to add 220 customers, including 15 new Fortune 1000 logos when it closes the recently announced $400 million acquisition of Cervalis, LLC, covered in more detail below.

Tale Of The Tape - Past Year

The Vanguard REIT Index ETF VNQ is a good proxy for broader equity REIT sector performance.

CyrusOne - Q1 Earnings Highlights

Sheehy briefly reviewed CONE's Q1 results which had recently been released on May 7. Notably, the 60,000 SF leased during Q1 represented one of the top three quarters in company history. Sheehy pointed out that the deals CONE has been signing included annual escalators averaging between 2.5 to 3 percent, embedding organic growth in the leases.

Cincinnati - Home Court Advantage

When CyrusOne was initially spun out of Cincinnati Bell Inc. CBB in January 2013, the parent controlled 66 percent of CONE shares; but after two "monetization events," the stake has been reduced to 22 percent, with the balance of the investment expected to be liquidated in a similar fashion. Because of CyrusOne's Cincinnati roots, the data center REIT has a major presence with 420,000 SF of raised floor space, anchored by CBB. Sheehy noted that there were a significant number of Fortune 1000 headquarters located in Cincinnati, however, not to expect more than single-digit growth, since they are basically leasing to the entire addressable market. This compares with double-digit growth in CONE's more dynamic data center markets.

Cervalis - What CONE Is Buying

The Cervalis organization has skill sets to provide managed services to customers which go beyond CyrusOne's currently product offerings to its existing customer base. Notably, CONE had no previous presence in the greater NYC area, a major Internet hub which is a critical piece of the data puzzle for the U.S. and global financial sector.

Cervalis: Financial Vertical - Diversifies Customer Base

During the past nine months there has been considerable focus on CONE's large revenues derived from the Energy vertical markets, given the recent slide in the price of oil. That said, Sheehy pointed out in Q1 2015 CONE's Energy sector revenues were strong, along with growth in IT services sector. However, after the closing of the Cervalis purchase, will Financial Services vertical will rebalance revenues, with CONE's growing Energy sector only accounting for 22 percent of revenue.

Cervalis - No Geographic Overlap

Having revenues in the NY/NJ/CT markets go from zero to 18 percent, rebalances revenues by region favorably for CyrusOne. While impossible to quantify, adding the greater NYC region to the CONE IX network should also help to grow revenues throughout the U.S. and internationally.

Cervalis - CONE Bottom Line

The purchase of Cervalis at a 10.5x EBITDA multiple will be immediately accretive to CONE, increasing FFO an estimated 5 percent in 2H 2015, and projected to add at least 9 percent in 2016. Sheehy expects that CyrusOne will issue no more than $200 million in new equity in conjunction with the purchase of Cervalis.

Investor Takeaway

Existing customers have historically accounted for ~50 percent of quarterly revenue growth through buying more cross-connects, increasing power requirements, and expanding space requirements. Sheehy mentioned that during Q1 2015 ~70 percent of increased revenues were attributed to existing customers, led by much stronger Y/Y performance in the Energy vertical. Additionally, CyrusOne brought the first 37,000 square feet of colocation space at its Northern VA data center located in Loudoun County online in January. The initial phase of the 146,000-square-foot building is going to have 16,000 square feet of office space and the capacity for up to 12 megawatts of critical load.