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CONE > SEC Filings for CONE > Form 10-Q on 8-Aug-2014All Recent SEC Filings

Show all filings for CYRUSONE INC.

Form 10-Q for CYRUSONE INC.


8-Aug-2014

Quarterly Report


ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
This Report on Form 10-Q (this "Quarterly Report"), together with other statements and information publicly disseminated by our company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance, financial condition and results of operations contain certain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "approximately,""intends," "plans" "estimates," or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify as a REIT; (x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in real property tax rates; (xii) delays or disruptions in third-party network connectivity; (xiii) service failures or price increases by third party power suppliers; (xiv) inability to renew net leases on the data center properties we lease; and (xv) other factors affecting the real estate industry generally. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results.

Presentation
References in this Quarterly Report to "Successor" refers to the Company on or after January 24, 2013 and "Predecessor" are the results prior to January 24, 2013. The Predecessor results have been prepared on a "carve-out" basis from CBI's
consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to the data center business. These allocations reflect significant assumptions, and the combined financial statements do not fully reflect what the financial position, results of operations and cash flows would have been had CyrusOne been a stand-alone company during the periods presented. As a result, historical financial information is not necessarily indicative of CyrusOne's future results of operations, financial position and cash flows. The related financial statement tables will be presented showing the statements that relate to the Predecessor as well as the Successor. The results of both the Predecessor and Successor are presented separately but will be discussed on a combined basis for comparability purposes.


Table of Contents

Overview
Our Company. We are an owner, operator and developer of enterprise-class, carrier-neutral data center properties. Enterprise-class, carrier-neutral data centers are purpose-built facilities with redundant power, cooling and access to a range of telecommunications carriers. We provide mission-critical data center facilities that protect and ensure the continued operation of information technology ("IT") infrastructure for 648 customers in 25 operating data centers in ten distinct markets (eight cities in the U.S., London and Singapore). We provide mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure for our customers. Our goal is to be the preferred global data center provider to the Fortune 1000. As of June 30, 2014, our customers included nine of the Fortune 20 and 139 of the Fortune 1000 or private or foreign enterprises of equivalent size. These 139 Fortune 1000 customers provided 75% of our annualized rent as of June 30, 2014. Additionally, as of June 30, 2014, our top 10 customers represented 42% of our annualized rent.
We cultivate long-term strategic relationships with our customers and provide them with solutions for their data center facilities and IT infrastructure challenges. Our offerings provide flexibility, reliability and security delivered through a tailored, customer service focused platform that is designed to foster long-term relationships. We focus on attracting customers that have not historically outsourced their data center needs and providing them with solutions that address their current and future needs. Our facilities and construction design allow us to offer flexibility in density, power resiliency and the opportunity for expansion as our customers' needs grow. The National IX Platform delivers interconnection across states and between metro-enabled sites within the CyrusOne footprint and beyond. The platform enables high-performance, low-cost data transfer and accessibility for customers by uniting all of our data centers.
Our Portfolio. As of June 30, 2014, our property portfolio included 25 operating data centers in ten distinct markets collectively providing approximately 2,170,000 net rentable square feet ("NRSF"), of which 84% was leased, and powered by approximately 183 MW of available UPS capacity. We own fourteen of the buildings in which our data center facilities are located. We lease the remaining eleven buildings, which account for approximately 375,000 NRSF, or approximately 17% of our total operating NRSF. These leased buildings accounted for 23% of our total annualized rent as of June 30, 2014. We also currently have 706,000 NRSF under development, as well as 551,000 NRSF of additional powered shell space under roof available for development. In addition, we have approximately 200 acres of land that are available for future data center shell development. Along with our primary product offering, leasing of colocation space, our customers are increasingly interested in ancillary office and other space. We believe our existing operating portfolio and development pipeline will allow us to meet the evolving needs of our existing customers and continue to attract new customers. The following tables provide an overview of our operating and development properties as of June 30, 2014.


Table of Contents

                                 CyrusOne Inc.
                             Data Center Portfolio
                              As of June 30, 2014
                                  (Unaudited)

                                                                                                      Operating Net Rentable Square Feet (NRSF)(a)
                                                                                                                                                                                    Powered
                                                                                                                                                                                    Shell
                                                                                                                                      Office                                       Available
                                                                         Colocation                                                   & Other      Supporting                     for Future
                                           Metro        Annualized         Space                              CSF         Office &    Leased     Infrastructure                   Development       Available UPS
Facilities                                 Area           Rent(b)         (CSF)(c)      CSF Leased(d)     Utilized(e)     Other(f)      (g)           (h)           Total(i)       (NRSF)(j)      Capacity  (MW)(k)
Westway Park Blvd. (Houston West 1)     Houston       $  50,875,170        112,133             97 %             97 %       10,563        98 %           37,063       159,759           3,000                    28
S. State Hwy 121 Business (Lewisville)* Dallas           39,772,133        108,687             97 %             97 %       11,279        96 %           59,345       179,311               -                    18
Southwest Fwy. (Galleria)               Houston          37,536,283         63,469             92 %             92 %       17,259        69 %           23,203       103,931               -                    14
West Seventh Street (7th St.)***        Cincinnati       34,540,103        211,742             90 %             91 %        5,744       100 %          171,561       389,047          37,000                    13
Fujitec Drive (Lebanon)                 Cincinnati       23,046,267         65,303             81 %             81 %       44,886        72 %           52,950       163,139          65,000                    14
W. Frankford Road (Carrollton)          Dallas           20,001,025        170,531             64 %             65 %       13,745        70 %           66,061       250,337         334,000                    18
Westover Hills Blvd. (San Antonio 1)    San Antonio      17,856,512         43,843            100 %            100 %        5,633        85 %           45,939        95,415          11,000                    12
Industrial Road (Florence)              Cincinnati       14,856,505         52,698            100 %            100 %       46,848        87 %           40,374       139,920               -                     9
South Ellis Street (Phoenix 1)          Phoenix          14,531,119         77,528             97 %             98 %       34,471        10 %           38,441       150,440          31,000                    16
Knightsbridge Drive (Hamilton)*         Cincinnati       11,436,136         46,565             83 %             83 %        1,077       100 %           35,336        82,978               -                    10
Westway Park Blvd. (Houston West 2)     Houston           8,069,274         79,492             68 %             68 %        3,112        31 %           55,642       138,246          12,000                    12
Metropolis Drive (Austin 2)             Austin            8,032,540         37,780             82 %             82 %        4,128        17 %           18,444        60,352               -                     5
E. Ben White Blvd. (Austin 1)*          Austin            6,206,419         16,223             87 %             87 %       21,376       100 %            7,516        45,115               -                     2
Parkway Dr. (Mason)                     Cincinnati        5,753,058         34,072            100 %            100 %       26,458        98 %           17,193        77,723               -                     4
Kestral Way (London)**                  London            4,872,910         10,000             99 %             99 %            -         - %                -        10,000               -                     1
Midway Rd.**                            Dallas            4,388,742          8,390            100 %            100 %            -         - %                -         8,390               -                     1
Springer Street (Lombard)               Chicago           2,551,385         13,516             54 %             54 %        4,115       100 %           12,230        29,861          29,000                     3
Marsh Ln.**                             Dallas            2,107,312          4,245            100 %            100 %            -         - %                -         4,245               -                     1
Goldcoast Drive (Goldcoast)             Cincinnati        1,465,776          2,728            100 %            100 %        5,280       100 %           16,481        24,489          14,000                     1
North Fwy. (Greenspoint)**              Houston           1,009,589         13,000            100 %            100 %        1,449       100 %                -        14,449               -                     1
Bryan St.**                             Dallas              979,973          3,020             57 %             57 %            -         - %                -         3,020               -                     1
E. Monroe Street (Monroe St.)           South Bend          937,505          6,350             64 %             64 %            -         - %            6,478        12,828           4,000                     1
McAuley Place (Blue Ash)*               Cincinnati          512,213          6,193             39 %             39 %        6,950       100 %            2,166        15,309               -                     1
Crescent Circle (Blackthorn)*           South Bend          401,055          3,432             31 %             31 %            -         - %            5,125         8,557          11,000                     1
Jurong East (Singapore)**               Singapore           311,280          3,200             19 %             19 %            -         - %                -         3,200               -                     1
Total                                                 $ 312,050,284      1,194,140             86 %             86 %      264,373        75 %          711,548     2,170,061         551,000                   183

* Indicates properties in which we hold a leasehold interest in the building shell and land. All data center infrastructure has been constructed by us and owned by us.

** Indicates properties in which we hold a leasehold interest in the building shell, land, and all data center infrastructure.

*** The information provided for the West Seventh Street (7th St.) property includes data for two facilities, one of which we lease and one of which we own.


Table of Contents

(a) Represents the total square feet of a building under lease or available for lease based on engineers' drawings and estimates but does not include space held for development or space used by CyrusOne.

(b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of June 30, 2014, multiplied by 12. For the month of June 2014, our total annualized rent was $312.1 million, customer reimbursements were $44.2 million annualized and consisted of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From July 1, 2012 through June 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of June 30, 2014 was $325,483,528. Our annualized effective rent was greater than our annualized rent as of June 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services.

(c) CSF represents the NRSF at an operating facility that is currently leased or readily available for lease as colocation space, where customers locate their servers and other IT equipment.

(d) Percent leased is determined based on CSF being billed to customers under signed leases as of June 30, 2014 divided by total CSF. Leases signed but not commenced as of June 2014 are not included.

(e) Utilization is calculated by dividing CSF under signed leases for colocation space (whether or not the customer has occupied the space) by total CSF.

(f) Represents the NRSF at an operating facility that is currently leased or readily available for lease as space other than CSF, which is typically office and other space.

(g) Percent leased is determined based on Office & Other space being billed to customers under signed leases as of June 30, 2014 divided by total Office & Other space. Leases signed but not commenced as of June 2014 are not included.

(h) Represents infrastructure support space, including mechanical, telecommunications and utility rooms, as well as building common areas.

(i) Represents the NRSF at an operating facility that is currently leased or readily available for lease. This excludes existing vacant space held for development.

(j) Represents space that is under roof that could be developed in the future for operating NRSF, rounded to the nearest 1,000.

(k) UPS capacity (also referred to as critical load) represents the aggregate power available for lease and exclusive use by customers from the facility's installed universal power supplies (UPS) expressed in terms of megawatts. The capacity reported is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels. Does not sum to total due to rounding.

                                 CyrusOne Inc.
                             NRSF Under Development
                              As of June 30, 2014
                             (Dollars in millions)
                                  (Unaudited)

                                                                                   NRSF Under Development(a)                                                       Under Development Costs(b)
                                                                                                                                                  UPS MW                   Estimated
                                   Metropolitan     Colocation Space                          Supporting                                         Capacity     Actual to     Costs to
Facilities                             Area              (CSF)           Office & Other     Infrastructure     Powered  Shell(c)      Total        (d)         Date(e)     Completion     Total
W. Frankford Road (Carrollton)     Dallas                         -             21,000              2,000                     -      23,000            -     $        1           $3-4         $3-4
Westover Hills Blvd. (San
Antonio 2)                         San Antonio               30,000             20,000             25,000                49,000     124,000          3.0              8          25-31        34-39
Westway Park Blvd. (Houston West
3)                                 Houston                        -                  -                  -               320,000     320,000            -              5          18-22        23-27
South Ellis Street, Chandler, AZ
(Phoenix 1)                        Phoenix                        -                  -                  -                     -           -         11.0              2           9-10        10-12
South Ellis Street, Chandler, AZ
(Phoenix 2)                        Phoenix                   60,000              8,000             18,000                19,000     105,000          6.0              2          36-44        38-46
Ridgetop Circle, Sterling, VA
(Northern VA)                      Loudon County             30,000             16,000             35,000                48,000     129,000          6.0              3          34-42        37-45
Metropolis Dr., Austin, TX
(Austin 2)                         Austin                     5,000                  -                  -                     -       5,000            -              -            1-2          1-2
Total                                                       125,000             65,000             80,000               436,000     706,000         26.0     $       21   $126.0-155.0 $146.0-175.0

(a) Represents NRSF at a facility for which activities have commenced or are expected to commence in the next 2 quarters to prepare the space for its intended use. Estimates and timing are subject to change.

(b) Represents management's estimate of the total costs required to complete the current NRSF under development. There may be an increase in costs if customers require greater power density.

(c) Represents NRSF under construction that, upon completion, will be powered shell available for future development into operating NRSF.

(d) UPS Capacity (also referred to as critical load) represents the aggregate power available for lease to and exclusive use by customers from the facility's installed universal power supplies (UPS) expressed in terms of megawatts. The capacity presented is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels.

(e) Capex-to-date is the cash investment as of June 30, 2014. There may be accruals above this amount for work completed, for which cash has not yet been paid.


Table of Contents

Our portfolio is currently leased to 648 companies, many of which are leading global companies. The following table sets forth information regarding the 20 largest customers, including their affiliates, in our portfolio based on annualized rent as of June 30, 2014:

                                 CyrusOne Inc.
                          Customer Diversification(a)
                              As of June 30, 2014
                                  (Unaudited)

                                                                                              Weighted
                                                                          Percentage of        Average
                                                                            Portfolio         Remaining
                                           Number of     Annualized        Annualized       Lease Term in
        Principal Customer Industry        Locations       Rent(b)           Rent(c)          Months(d)
1   Telecommunications (CBI)(e)                7       $  21,611,833             6.9 %              20.8
2   Energy                                     2          21,465,172             6.9 %              29.0
3   Energy                                     4          14,891,031             4.8 %               6.2
4   Information Technology                     3          14,747,166             4.7 %              48.2
5   Research and Consulting Services           3          13,771,429             4.4 %              23.4
6   Telecommunication Services                 2          12,463,882             4.0 %              43.2
7   Information Technology                     1          11,605,866             3.7 %              57.0
8   Information Technology                     3           8,267,703             2.6 %              35.7
9   Financials                                 1           6,000,225             1.9 %              71.0
10  Telecommunication Services                 5           5,173,271             1.7 %              58.0
11  Financials                                 1           4,983,923             1.6 %              57.0
12  Consumer Staples                           1           4,838,160             1.6 %              94.3
13  Information Technology                     1           4,757,012             1.5 %              18.0
14  Energy                                     2           4,756,800             1.5 %              25.0
15  Information Technology                     1           4,565,709             1.5 %              80.0
16  Energy                                     1           4,460,872             1.4 %              10.9
17  Information Technology                     1           4,061,705             1.3 %              13.3
18  Information Technology                     2           3,962,844             1.3 %              81.8
19  Energy                                     3           3,879,224             1.2 %               9.6
20  Energy                                     1           3,637,239             1.2 %              23.3
                                                       $ 173,901,066            55.7 %              36.1

(a) Includes affiliates.

(b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of June 30, 2014, multiplied by 12. For the month of June 2014, our total annualized rent was $312.1 million, and customer reimbursements were $44.2 million annualized, consisting of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From July 1, 2012 through June 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of June 30, 2014 was $325,483,528. Our annualized effective rent was greater than our annualized rent as of June 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services.

(c) Represents the customer's total annualized rent divided by the total annualized rent in the portfolio as of June 30, 2014, which was approximately $312.1 million.

(d) Weighted average based on customer's percentage of total annualized rent . . .

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