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One of our strongest picks today is CyrusOne (CONE), a leading data center REIT with over 40 properties worldwide and is trusted by nearly half of the Fortune 20 and over 190 of the Fortune 1000. More recently the company has taken a number of steps to position the business to serve its enterprise customers globally, creating a significant growth opportunity over the coming years.
There are always growing pains to be expected and that’s what happens when you are building out a global footprint (targeting the largest data center markets in Europe). CyrusOne expects to invest $400 million of the 2019 capex budget in EU and U.K. projects so the company can become competitive with other powerhouse data players such as Digital Realty (DLR) and Equinix (EQIX).
CyrusOne provided 2019 guidance, lowering normalized FFO per share ($3.10-$3.20) vs. the $3.31 achieved during 2018. The main reason for the disappointing 2019 guidance harkens back to CyrusOne’s strategic decision to become the third U.S.-based REIT to offer a global data center footprint to hyperscale customers.
While it was concerning not to see the company increasing its dividend in 2019, I’m convinced it has set the stage for growth in 2020 and beyond, and the company has outsized potential to generate returns in the high double-digits. We view the recent pullback as an opportunity to place more chips on this transformative data center REIT.
More recently, we caught up with CyrusOne’s CEO, Gary Wojtaszek, to discuss a variety of topics.
Brad Thomas (BT): First let’s talk domestic growth, and what’s the pipeline today?
Gary Wojtaszek (GW): US demand remains very strong, and we just had a blowout leasing year, with record bookings nearly 50% higher than the total for the prior year
Our sales funnel as of the end of the year is as big as it’s ever been, and we are positioned with capacity across all key domestic markets to meet the demand.
BT: What about external growth opportunities?
GW: We don’t need to pursue external growth opportunities at this time. In the US, we recently acquired land in the one major market we were not in, Santa Clara, and now have a presence in all the major domestic markets.
In Europe, with the closing of Zenium acquisition last August and additional sites in process, we have a prospective footprint of nearly 500 megawatts across all of the top European markets, including London, Frankfurt, Amsterdam and Dublin
BT: How is CONE paying for the growth?
GW: We have substantial liquidity, with more than $1.6 billion in available capacity to fund our growth as of the beginning of the year. Historically we have funded our growth through internally generated cash flow, debt and equity, with the mix driven by our targeted leverage range.
BT: How is the balance sheet shaping up?
GW: We have a very strong balance sheet with more than $1.6 billion in available liquidity, no debt maturities in the next 5 years, and we are 100% unsecured, giving us substantial financial flexibility. Our capital structure consists of approximately 70% equity, and S&P recently gave us an investment grade credit rating, which reflects the financial strength of the company.
BT: CONE’s 2019 guidance lowered normalized FFO per share ($3.10-$3.20) vs. the $3.31 achieved during 2018. What was the purpose for the pullback?
GW: First, note that adjusted for the new accounting standards we adopted this year, 2018 NFFO per share would have been $3.22, rather than $3.31. Also, this is a significant investment year as we position the company for long-term growth, adding capacity in 4 new markets in Europe and 1 new market in the U.S., all while continuing to invest in our existing markets.
The scale of our leasing has been significantly larger than our peers in terms of relative performance compared to our revenue base, and we are growing two to three times faster, so we are investing to support this growth. We expect all of these investments to be highly accretive and generate very attractive returns for our shareholders.
BT: Also, CONE is not increasing the dividend in 2019. Why? Also, what’s your target payout ratio?
GW: When considering how to maximize value to our shareholders, we try to be very thoughtful in determining the optimal allocation between retaining a reasonable level of cash for our capital requirements, which drives our continued growth, and paying an attractive cash dividend to our investors.
With the significant growth opportunities that we have domestically and in Europe, we believe it’s better to allocate capital to invest in these opportunities, which have very attractive return profiles, rather than to increase the dividend. Based on our current stock price, our dividend yield is over 3.5%. We do not have a stated targeted payout ratio, but we have sized the dividend so that our payout ratio is relatively in line with those of our peers.
BT: Can you touch on the GDS investment and how that is playing out?
GW: William and his team have built a great business, and the relationship with GDS has been outstanding, even surpassing my expectations. They continue to post staggering results as their business in China is exploding, and the value of our equity investment in GDS has nearly tripled. We also leased nearly 20 megawatts with Chinese hyperscale companies in 2018 as a direct result of the relationship, so we are off to a great start.
BT: Finally, how would you define CONE’s “moat” in a few sentences?
GW: We have a world class sales force that has tremendous experience, helping drive significant leasing outperformance, with bookings levels that are roughly double our revenue share.
We also have the fastest build times and lowest build costs, enabling us to be very successful leasing to hyperscale companies in particular while generating attractive returns for our shareholders. Lastly, we have a very flexible product offering and are able to customize solutions to meet our customers’ unique, specific needs.
I own shares in CONE.