Data Center REIT CyrusOne Sprints Ahead In Cloud Leasing Race, Yet 'No Respect'

By any measure, data center REIT CyrusOne (CONE) just knocked the ball out of the park last quarter, and this leasing momentum continued into the third quarter.

According to Gary Wojtaszek, CyrusOne president and CEO.  "This was the strongest leasing quarter in the Company's history, and we believe it is also a record for the industry," He added, "These results reflect continued strong operational and financial performance, and our ability to deliver data centers at the fastest time to market has enabled our hyper-scale customers to keep pace with their increasing capacity requirements."

Since speed to market was a major factor in winning these large-scale cloud deployments, hitting an inside-the-park home run -- where a swift runner beats the throw to home plate -- is a better analogy.

It is a real "head-scratcher" how a 34 percent earnings growth rate can disappoint investors.

Record Leasing

CyrusOne leased 282,000 colocation square feet (CSF) and 40 MW of power in the second quarter, representing approximately $58 million in annualized contracted GAAP revenue.

Subsequent to the end of Q2 2016, CyrusOne purchased a 130,000 SF building shell located in Sterling, Virginia near its existing campus. The building supports 12 MW of critical load, and some data halls are scheduled to be complete prior to year-end.

CyrusOne added another $14 million in annualized GAAP leasing revenue during the month of July, boosting the CyrusOne booked-not-billed backlog to a record $96 million.

CONE - Q2 2016 Operating Results

CyrusOne was the last of publicly traded REITs involved in the wholesale side of the business to report results for the quarter ended June 30, 2016. Highlights included:

Carrollton, Texas-based CyrusOne's business strategy is focused on the enterprise market, and counts 177 Fortune 1000 logos among its 950 customers.

Read more: CyrusOne Plans Huge Expansion at CME Data Center Campus in Chicago

Notably, during the last quarter, CyrusOne energy sector bookings increased by 55 percent, compared to the trailing 12 month average.

Tale Of The Tape - Shares Fell?

The Investor Day 2016 presentation, management guided to a doubling of the company in five years, or 20 percent compounded annual growth rate (CAGR). It appears that CyrusOne is considerably ahead of plan.

Source: Finviz.com

During the past 52-weeks, CyrusOne shares have traded in a range of $28.81 - $57.00 per share. As of this writing, CONE shares have lost ~6 percent of their value since the recent earnings call.

Read more: CoreSite Realty: Strong Q2 Overshadowed By CEO Tom Ray’s Departure

Wall Street analysts must have built some pretty aggressive models to be disappointed by CyrusOne's Q2 2016 results. During the conference call, it became obvious that analysts were disappointed the high-end of FFO per share guidance for FY 2016 was not increased.

A hefty increase in G&A, which management felt was necessary to handle rapid growth and operate at a larger scale was at least partially responsible. However, long-term investors will reap rewards from these moves in 2017 and beyond.

Portfolio Occupancy and Utilization

During the second quarter, CyrusOne completed construction on approximately 395,000 SF and 61 MW of power capacity in Northern Virginia, San Antonio, Phoenix, Dallas, and Houston.

This increased total computer room space across 35 data centers to approximately 2,006,000 SF, which represents an increase of 652,000 SF, or 48 percent year-over-year.

Data center utilization at the end of the second quarter was 92 percent for stabilized properties and 84 percent overall.

CyrusOne has development projects underway in Northern Virginia, San Antonio, Phoenix and Chicago that will add approximately 259,000 SF and 50 MW of critical power capacity.

CyrusOne has an additional 851,000 square feet of powered shell available for development as well as 230 acres of land across its markets.

Read more: Another Huge Quarter for Data Center REITs: What’s Next?

Investor Takeaway

According to the company, the Massively Modular design responsible for the speedy large data hall build-outs and accelerated ground-up development is delivering space at well below $7 million/MW and consistently delivers development yields ranging from 16 percent to 19 percent.

Rodney Dangerfield was a comedian famous for the tag-line, "I don't get no respect!"

After the Q1 2016 earnings announcements, I wrote: "Investors and analysts will be eagerly listening to upcoming earnings calls for clues regarding lease signings and other catalysts not currently reflected in earnings models. Despite all the recent success, management will be under pressure to answer to the age-old question: What have you done lately?"

Evidently, record leasing, a huge backlog, and a development pipeline de-risked by build-to-suits and pre-leasing wasn't enough for Wall Street, given the huge gains in CyrusOne shares year-to-date.

Another Dangerfield line was: "I remember the time I was kidnapped and they sent a piece of my finger to my father. He said he wanted more proof."

CyrusOne, is delivering ROIC in the mid-to-high teens. Clearly, FFO per share in 2017 will continue to grow at a phenomenal pace. Unlike some of its REIT peers, CyrusOne has plenty of land and powered shell capacity in its key markets.