CyrusOne CFO on graduating to investment grade

CyrusOne is one of the world’s main data centre operators, and since going public in 2013, it has enjoyed over 20% CAGR across several of its financial metrics. From heavy expansion in the US to a strong M&A transaction in Europe and capital investment in China, CyrusOne portfolio has specially in the last 24 months become a key competitor in its field globally. And the company is not done yet, as CFO Diane M. Morefield points out to João Marques Lima in this exclusive interview.

What are the biggest trends you are seeing in the data centre marketplace that are driving your revenues up and “forcing” CyrusOne to expand?

The trends we are experiencing in the data centre marketplace are largely similar to the past few years. Significant demand is being driven by the Cloud/Hyperscale customers with the deals getting larger and longer-term in nature. However, we continue to see strong demand from enterprise customers as well. Our revenue in 2019 is roughly 40% cloud – trending to become 60-70% – and 60% enterprise customers, but we forecast that mix to flip to be 60% cloud and 40% enterprise over the next few years. In addition, our leasing pipeline represents the latter mix as well. Regarding the Cloud vertical, we are definitely seeing the trend for larger and more structured transactions.

Another major trend is the global demand coming from the Cloud companies, resulting in our expansion into four European markets (London, Frankfurt, Amsterdam and Dublin) over the past year, coupled with our investment and commercial partnership with GDS in China, and OData in Latin America.

Receiving an investment grade has been a goal for CyrusOne for a while and it seems like it has happened. What has been your strategy to drive the company towards that grade and what’s next?

In any capital-intensive business, it’s a significant advantage to have an investment grade (IG) rating. Given the capital-intensive nature of the data centre business, and strong demand and growth drivers we anticipate for years to come, it’s been a top priority for CyrusOne to achieve an IG rating. As you noted, we are 50% of the way there with S&P having upgraded us to IG last fall. We are confident that we will get a second IG rating within the next year or so.

The advantages include a lower weighted average cost of capital with an IG rating, which results in a boost to our NFFO per share earnings given lower borrowing costs. In addition, the investment grade bond market never shuts down, even in softer economic cycles, which is critical to always have access to capital to keep our development pipeline funded. Finally, IG rated REITs generally trade at higher earnings multiples, so we could also see multiple expansion, enhancing our share price when we achieve investment grade.

On the investment front, why has the CAPEX guidance been decreased in tighten with investments expected in 2019 now likely to happen in 2020? Will this amount to $750m?

We lowered the top end of our CapEx guidance range on our recent earnings call by $100m, to $1bn. This is still significant capital spending as we continue to build out data center inventory in five new markets (the four European markets and Santa Clara, CA). In addition, we continue to build data centre capacity in our top US markets, including N. Virginia and Phoenix. The main reason for the reduction in the top end of the range is largely timing. The execution of large Cloud leases has been taking longer in the past couple of quarters, which also delays building out the data halls related to signed leases. Also, our development in Dublin has been delayed a bit as a result of finalizing our line of sight to power commitments in that market.

In Europe, London and Frankfurt are the two main markets for you and in the latest earnings call you said that “European expansion will further enhance the geographic diversification of the portfolio”. What CAPEX plans are there for CyrusOne in Europe, both organic and M&A?

Last September we closed the Zenium transaction for approximately $500m, which provided us ownership of four existing data centers in London and Frankfurt, along with additional sites in those markets under Zenium’s control. This acquisition, coupled with the sites we acquired directly in Amsterdam, London and Dublin has positioned us extremely well for growth and expansion across Europe to meet our customers’ demand. This also provides excellent geographic diversification, when combined with our various major markets across the US.

Our CapEx spending is more weighted, on the margin, to the European markets since we are doing ground up development in all four of those markets. Of the approximately $1bn capital spend guidance for 2019, roughly 35-40% of it is earmarked to the European platform.

Then in LATAM, last year as well you signed a partnership with ODATA in Brazil. What is the plan for the region? Will you be increasing your investment there? Could you be looking at buying assets?

We are incredibly excited about our 10% investment in OData in Latin America. We had been searching for a good entry into LATAM, again given what we were hearing directly from our Cloud customers regarding the markets where they need data centre space.

We hope to continue to grow with OData, funding our 10% pro rata equity share as they develop and deploy more capital. We have also provided them with a pipeline of customer leads and they have successfully executed leases with US Hyperscale customers as a direct result of our partnership. So, we have already experienced early successes.

Diane M. Morefield, CFO at CyrusOne

They have the market-based team and local expertise, so we would continue to grow in that market through the OData platform versus buying assets directly.

Could we see a similar move from your side in the African continent with a provider out there? And what sort of African markets are you paying attention to?

We are currently focused on the international markets that we are already invested in Europe, LATAM and indirectly in China. We have a large capital pipeline and want to remain focused, so we are not looking at other markets in the near term.

For example, since the inception of the GDS relationship, we have signed leases for 25 MWs of business with Chinese hyperscalers, and GDS has executed leases with our US hyperscale customers as well.

CyrusOne is one of the world’s top data centre REITs. Its financial performance has not raised many questions and the results are positive. What sort of market cap projections do you have for CyrusOne in the future?

CyrusOne has enjoyed a 20% plus CAGR across all our key financial metrics since going public in early 2013. Given the demand drivers of our business, we are confident in our continued growth trajectory. On an organic (eg.: our own data centre development) basis we project growth in the 10-15% range in the coming years, assuming capital spending in the $750m range per annum.

Any M&A or higher capital spending would increase that growth rate more in the 20% range.

How do you see the CFO role evolving in the digital age?

The CFO role has evolved significantly in just the past few years given the explosion of new technologies that are used by accounting/finance organisations. It’s important for the CFO and their team to stay current on what new technologies can enhance the productivity and processes of our organisations.

A CFO has to be open minded to the use of technology and work closely with the IT/Technology chief and their department to remain cutting edge in the finance organisation.