The parade of data center REITs reporting exceptional Q4 and full-year 2015 results has just become even more impressive.
CyrusOne (CONE) crushed results across the board during 2015, including record leasing of 30MW across more than 200,000 square feet of data center space in the fourth quarter alone. The company is expanding capacity across six markets, but its biggest expansion plans are in New Jersey.
CyrusOne CEO Gary Wojtaszek said the flexibility for his customers to lease anywhere from a single rack to 10MW of capacity was a key reason for success in 2015. He also pointed to the company’s ability to deliver data halls in just a few months’ time at less than $7 million per megawatt.
Leasing activity was split fairly evenly between existing customer expansions and more than 170 new logos added last year. The signing of more than 1,400 leases contributed to a record $42 million backlog for future customer deployments. CyrusOne expects to book between $19 and $24 million of annualized revenue in the second half of 2016, with the balance recognized in 2017.
The company has historically focused its sales and marketing on Fortune 1000 enterprises. It has evolved from a Texas-based data center landlord for the energy sector to add financial firms, connectivity, and large cloud providers to the mix. Last year, about 80 percent of leases it signed included an interconnection product. CyrusOne now leases to eight of the largest public cloud providers.
During 2015, 84 percent of signed contracts contained escalators for monthly recurring revenues. Most notably, the average lease term for deals executed in Q4 2015 was just under nine years. These leases boosted the weighted-average lease term for the entire portfolio by 12 months, up to 40 months, which is an all-time high.
Big New Jersey Expansion Plans
Last year CyrusOne closed its $400 million acquisition of Cervalis, a colocation and disaster recovery data center provider with extensive operations in the New York market. Many Wall Street firms were key customers, with financial services representing two-thirds of its revenue.
On the earnings call, Wojtaszek revealed that CyrusOne is now looking to expand its operations into “god’s country,” aka Northern New Jersey. Wojtaszek is agnostic regarding the New Jersey expansion and is willing to purchase land for ground-up development if a suitable facility can’t be bought at an attractive price.
New Jersey has not exactly been a hot bed of data center leasing activity, with only 2MW of leasing reported for last year. Many financial sector clients have moved operations to Northern Virginia, which has data center tax incentives and much lower power costs.
CyrusOne competitor DuPont Fabros Technology earlier this year said it was exiting the New Jersey market and selling its large data center there. CyrusOne may be one of the potential buyers.
But there are more forces at play than just New Jersey market dynamics. DuPont Fabros is changing its business strategy, which is now radically different from CyrusOne’s, and its execs say New Jersey just isn’t a good fit for its new pure-play wholesale data center focus.
Tough Times for Core Energy Vertical
On the call, CyrusOne acknowledged that this was a “tumultuous period” for its energy-sector customers. However, management pointed out that over 80 percent of its energy-sector leases are with companies whose annual revenues exceed $5 billion.
Notably, one top-20 energy customer accounts for about 1 percent of CyrusOne’s revenue and has a lease coming due in 2016.
The vertical has continued to grow within CyrusOne’s footprint at a steady 7 percent on average, despite the drop in oil prices. CyrusOne operates 255,000 square feet in Houston, where space utilization of grew to 88 percent last year, up from 85 percent in 2014.
Outstanding 2015 Performance
By almost any measure, 2015 was a banner year for CyrusOne.
Source: CONE – Q4 2016 Earnings presentation
Big Dividend Increase
Strong earnings growth has resulted in an incredible 138 percent average growth rate in the quarterly dividend distribution to shareholders since the CyrusOne IPO.
Source: CONE – Q4 2015 Earnings presentation
What to Expect in 2016
Predictably, strong leasing activity has accelerated CyrusOne construction spending in 2016. CyrusOne has development projects underway in Dallas, San Antonio, Houston, Phoenix, and Northern Virginia that will add approximately 355,000 square feet of data center space total.
Key 2016 guidance metrics:
- Adjusted EBITDA: 2016E of $258-$268 million, an increase of 24 percent vs 2015 at the midpoint
- NFFO per share: 2016E of $2.45-$2.55, an increase of 15.2 percent vs 2015 at the midpoint
- Capital Expenditures: 2016E of $320-$345 million, an increase of 41.5 percent vs 2015 at the midpoint
- New Development: 2016E of $316-$337 million, an increase of 40 percent vs 2015 at the midpoint
An alliance agreement has recently been signed with Australia-based Megaport to deliver SDN-enabled elastic cloud interconnection services in CyrusOne data centers.
Management guided analysts to model a more normalized churn rate of 6 to 8 percent for 2016.
Notably, CyrusOne’s quarterly interconnection revenue is growing at over 50 percent on average, albeit off of a small base, just 7 percent of revenues. The company is in the early stages of building its cloud ecosystem but already has more than 11,000 cross-connects. Notably, it only has 23 customers in Northern Virginia, which is the most active US data center market and one of the most active interconnection markets.
CyrusOne appears to be well-positioned to benefit from industry trends, including C-level technology execs wanting more flexibility in their IT stacks, the rise of hybrid cloud, and accelerating trends in third-party data center outsourcing.
CONE shares traded up 4 percent after the earnings call on February 24 to close at $38.64 per share, or 15.4x 2016E FFO at the midpoint. The forward yield based upon the new $0.38 per share is a very attractive 3.93 percent, given the high growth rate. I remain constructive on CONE shares for 2016, despite the fact that they are trading near their 52-week high.