CyrusOne, whose business skyrocketed during the US hyperscale data center boom a few years ago, is having a harder time closing hyperscale deals in an increasingly competitive market.
While enterprise leasing was solid in the third quarter, the company didn’t get much hyperscale business, where each deal gives a big revenue boost. CyrusOne’s new president and CEO, Bruce Duncan, acknowledged on the quarterly earnings call last week that the company lost market share in the US, and that it needed to get back to winning more hyperscale deals in the biggest and most mature data center market.
The company signed leases for a total of 15,000 square feet and 4MW of data center capacity during the quarter, representing $11 million in annualized rent and $595 million total contract value. That’s compared to 22MW for $37 million in annualized rent in the second quarter and 44MW for $60 million in the first.
Total revenue for the third quarter was $262.8 million, up 5 percent year over year. FFO (Funds from Operations) per share was $0.96, also a 5 percent increase.
“I'd like to be straightforward, and the only thing I can say about our leasing results for the third quarter is that they were very disappointing,” Duncan said on the call last week. “We have talked about the lumpiness of the hyperscale business and how the timing of these larger deals can impact bookings from quarter to quarter.”
This “lumpiness” is a reality of having a business that draws a big portion of its revenue from large, long-term leases. A data center operator may score just one or two such leases during a quarter and as a result report stellar results for the period overall.
CyrusOne’s largest peers, other publicly traded US-based data center REITs that combine retail colocation with wholesale leasing, reported better leasing results for the quarter. Digital Realty reported $89 million in annualized rent from bookings; QTS Realty had its “second highest leasing quarter” ever, adding $26 million in annualized rent, the bulk of it from three hyperscale deals in the US; CoreSite added $12.5 million in annualized rent.
Reporting weak leasing results in combination with large capital investment that’s needed in order to continue buying land and building facilities to make sure you can score those large leases when they do come along makes for a message short-term-minded public markets don’t like.
Asked by an analyst on the earnings call about what changes Duncan was making to regain market share, the CEO pointed out the recent appointment of a new head of sales and said the company was targeting lower investment yields on developments (8 percent to 10 percent), making itself “a little bit more aggressive.”
“And as I had mentioned – I didn't mince words – I was disappointed in our ... hyperscale leasing in the third quarter,” he said. “I don't plan to be disappointed in the fourth quarter.”
A New Management Team
CyrusOne has recently gone through a major shakeup at the executive level.
Duncan was appointed this past June, replacing the company’s former CEO Gary Wojtaszek, who resigned in January following a rough year for the company’s stock. Earlier that month CyrusOne laid off 12 percent of its workforce, with Wojtaszek saying the move was necessary to adjust for slowing demand for data center space from hyperscale platforms.
- In September CyrusOne appointed its former executive John Hatem as its new chief operating officer, replacing Kevin Timmons.
- In October the company appointed Katherine Motlagh as executive VP and CFO. Formerly a CFO at American Tower, Motlagh is replacing Diane Morefield, who is retiring.
- Brent Behrman has switched roles from CyrusOne’s executive VP of solutions engineering to its executive VP of sales (the new head of sales Duncan mentioned).
- CyrusOne’s general counsel Robert Jackson will now also oversee the HR function.
“With the team in place, we will now be evaluating together all the key areas of the business, including among other things our capital allocation strategy, our existing portfolio of assets, our funding strategy, and our cost structure,” Duncan said. “We are going to be very focused on closing the valuation gap between us and our very good competitors.”
Enterprise Deals Drove Business in Q3
About 50 percent of CyrusOne’s third-quarter revenue came from large leases by cloud platforms. The rest came from customers in the financial services, enterprise IT, telecom, industrial, energy, healthcare, and managed IT services verticals.
Almost 90 percent of the annualized revenue from leases signed in the third quarter comes from smaller enterprise deals. Most of the deals signed were for 500kW or less.
Duncan said the third quarter was similar to the data center operator’s fourth quarter of 2019, which saw weak leasing but “was followed by two very strong quarters…”
Growth in Europe
More than half of the new revenue signed was in Europe, Duncan said, highlighting a recent trend of faster growth in European data center markets than in the traditionally fastest-growing US markets.
CyrusOne’s largest competitor Digital Realty also said last week that its business growth in Europe (and Asia Pacific) outpaced North America.
Duncan attributed the dynamic to the increased competition in the US markets, driven by the influx of new, low-cost capital and to accelerating demand from hyperscalers in Europe, where supply is more “constrained.”
Overall, hyperscale drove a bigger portion of new business for CyrusOne so far this year than last. Hyperscale platforms were responsible for 70 percent of new bookings year to date, compared to 51 percent in 2019, Duncan said.
Investment in Expansion
CyrusOne bought 33 acres of land in London during the third quarter, with access to about 100MW of power, to support growth in that market. The future data center on the site is already more than 60 percent pre-leased.
The company brought 6MW of new capacity online in the US during the period (fully leased) and has another 22MW under construction in the US and 56MW in Europe, with lease commitments on hand for more than 60 percent of the total new capacity.
To fund its expansion activities and to repay debt, CyrusOne agreed to sell about $219 million worth of shares through a forward sale during the quarter and issued $400 million in senior notes.