Will CyrusOne Become a REIT?

cyrusone-gensets

Several of the backup generators at one of the Texas data centers operated by CyrusOne. (Source: CyrusOne).

Will the CyrusOne colocation business become a real estate investment trust (REIT)? That's one of the possibilities being explored by Cincinnati Bell, which said last week that it was exploring whether to spin off its CyrusOne unit.

A REIT is a corporation or trust that uses the pooled capital of many investors to purchase and manage income property. Income comes from the rent and leasing of the properties, and REITs are legally required to distribute 90 percent of their taxable income to investors.  Three of the largest data center developers - Digital Realty (DLR), DuPont Fabros (DFT) and CoreSite Realty (COR) - are organized as REITs.

"We're in the beginning stages of assessing a REIT conversion," said Kurt Freyberger, the CFO of Cincinnati Bell, during the company's earnings call Friday. "We believe the data center business is not getting appropriately valued because it's attached to a telco."

REIT Performance A Factor

One factor in the analysis is the stock performance of the existing data center REITs, which gained between 14 and 30 percent in 2011. Cincinnati Bell says that creating shareholder value is the key driver in contemplating a spinoff or IPO of CyrusOne.

"It's hard not to appreciate the differential between what the REITs are currently trading at versus the corporate," said Gary Wojtaszek, the President of CyrusOne. "So we think that our business would be something that is REITable and when we have made some of the recent acquisitions, we've made those with the eye towards basically acquiring the land and structure. So we think that if we did choose (a REIT format), we would have that option available to us."

Wojtaszek said CyrusOne currently owns the real estate for about half its 20 data centers, but plans to eventually acquire the land for all of them.

"One of the big deltas in a REIT versus a C-Corp is that a REIT needs to own the property and own the building," said Jack Cassidy, the CEO and President of Cincinnati Bell. "Regardless of whether or not we do a REIT structure, we think that customers, particularly the customers we're after in the Fortune 1000 space, are far more comfortable when the colo company owns the facility and owns the land than if they're just doing a leaseback."

One recent example of a REIT conversion is American Tower (AMT), which operates wireless telecom towers. A REIT conversion has periodically been floated as a possibility for Equinix (EQIX), which gets most of its revenue from rent for data center space.

CyrusOne Launches Interconnection Service

In Friday's call, Cincinnati Bell executives also discussed the recent announcement that CyrusOne will enter the market for interconnections between customers in their data centers.

"Historically, we've just been kind of giving this stuff away," said Cassidy. "We've not really focused too much on this as a product line, and we're going to do a much better job of this going forward. All of our customers currently need interconnection services."

"With regard to the interconnection play, obviously it's a great business for us," said Wojtaszek. "It complements our existing assets really nicely. It's not capital intensive and it's basically 100% margin flow-through, so the opportunity to grow our EBITDA over time I think is going to be material."