U.S. Markets open in 6 hrs 16 mins

Edited Transcript of CONE earnings conference call or presentation 31-Oct-19 3:00pm GMT

Q3 2019 CyrusOne Inc Earnings Call

Carrollton Nov 4, 2019 (Thomson StreetEvents) -- Edited Transcript of CyrusOne Inc earnings conference call or presentation Thursday, October 31, 2019 at 3:00:00pm GMT

TEXT version of Transcript

================================================================================

Corporate Participants

================================================================================

* Diane M. Morefield

CyrusOne Inc. - Executive VP & CFO

* Gary J. Wojtaszek

CyrusOne Inc. - President, CEO & Director

* Michael Schafer

CyrusOne Inc. - VP, Capital Markets & IR

================================================================================

Conference Call Participants

================================================================================

* Ahmed Sami Badri

Crédit Suisse AG, Research Division - Senior Analyst

* Aryeh Klein

BMO Capital Markets Equity Research - Analyst

* Colby Alexander Synesael

Cowen and Company, LLC, Research Division - MD & Senior Research Analyst

* Erik Peter Rasmussen

Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst

* Frank Garrett Louthan

Raymond James & Associates, Inc., Research Division - MD of Equity Research

* Jonathan Atkin

RBC Capital Markets, Research Division - MD and Senior Analyst

* Jordan Sadler

KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst

* Michael J. Funk

BofA Merrill Lynch, Research Division - VP

* Nicholas Ralph Del Deo

MoffettNathanson LLC - Analyst

* Robert Ari Gutman

Guggenheim Securities, LLC, Research Division - Senior Analyst

* Simon William Flannery

Morgan Stanley, Research Division - MD

* Yong Choe

JP Morgan Chase & Co, Research Division - VP in Equity Research

================================================================================

Presentation

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

Good day, and welcome to the CyrusOne LLC Third Quarter 2019 Earnings Conference Call and Webcast. (Operator Instructions) Please note this event is being recorded.

I would now like to turn the conference over to Michael Schafer. Please go ahead.

--------------------------------------------------------------------------------

Michael Schafer, CyrusOne Inc. - VP, Capital Markets & IR [2]

--------------------------------------------------------------------------------

Thank you, Sarah. Good morning, everyone, and welcome to CyrusOne's Third Quarter 2019 Earnings Call. Today, I am joined by Gary Wojtaszek, President and CEO; and Diane Morefield, CFO.

Before we begin, I would like to remind you that our third quarter earnings release, along with the third quarter financial tables, are available on the Investor Relations section of our website at cyrusone.com.

I would also like to remind you that comments made on today's call, and some of the responses to your questions, deal with forward-looking statements related to CyrusOne and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on cyrusone.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law.

In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the Investors section of the company's website.

I would now like to turn the call over to our President and CEO, Gary Wojtaszek.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Thanks, Schafer, and welcome to CyrusOne's third quarter earnings call.

Let me start by saying that, while we've had some pretty good quarterly results over the last couple of years and a few that had larger bookings numbers, I can't recall a quarter that was stronger than this one given the large number of both financial and operational accomplishments. And I'm excited about the position we are in as we begin to look ahead to 2020.

Slide 4 shows the growth rates for revenue, adjusted EBITDA, normalized FFO and normalized FFO per share were all very strong in the quarter and are materially above the peer group and broader REIT averages. This was, in my view, the best leasing quarter in the company's history, with $52 million in annualized revenue signed and the most diversification we have ever had across markets, verticals and product types, including a big contribution from Europe. Our backlog is nearly $55 million, derisking our growth in 2020.

We have development activity across our markets in both the U.S. and Europe in response to the strong customer demand we are attracting. We are also -- recently acquired 20 acres of land in Iowa in connection with a lease to deliver a unique hybrid cloud solution for enterprises, allowing us to provide the provide -- the private cloud leg through an architecture that is significantly more efficient than the traditional on-ramp compute node network topology. Lastly, as you know, we have been focused for years on getting to investment grade, which will be incredibly important to our future success.

Slide 5 provides more color on the leasing results and, as I just mentioned, it was very broad based in both the U.S. and Europe. There were a couple of larger deals but the biggest was only 5.5 megawatts, and 7 markets had at least 1 megawatt of leasing, which highlights the benefit of having a geographically well-diversified portfolio.

We continue to have tremendous success leasing to enterprises. And this quarter, we signed a record $23 million in annualized revenue to enterprise customers, which is 40% above our prior record. It's always been a little surprising to me that so many investors view us as a hyperscale data center company, seemingly forgetting that the majority of our revenue is generated from enterprise companies.

We have always made the necessary investments in our sales and operational capabilities to serve the needs of the enterprise, which is expensive, difficult to do and time-consuming and which are the exact reasons why so many other companies shy away from this market and just want to focus on the hyperscalers. The benefits of these investments are easy to see as we have generated record enterprise sales over the last 4 quarters, which was particularly important as the hyperscale companies slowed their purchases.

We expect continued strong growth from enterprises in the coming years and are better positioned to capitalize on this demand than many other providers, especially as we now have a much larger international footprint. That said, we expect that demand from hyperscalers will begin to increase towards the second half of 2020, and we expect these companies will continue to contribute significantly to our growth as we expand internationally.

Moving to Slide 6. As you can see, our European business has really taken off. We expected to do well when we decided to expand into Europe and, fortunately, we are doing even better than we had originally anticipated. We made the decision to build the European platform after receiving so many requests from our hyperscale customers to develop our product in Europe, which historically has been an interconnection-focused data center market that lacked the large-scale data center deployments that CyrusOne is well-known for delivering in the U.S.

While our original underwriting assumed we would leverage our hyperscale business to initially grow the European market, we are absolutely focused on developing equally strong enterprise and IX businesses there, similar to what we built in the U.S. This will take a few years to develop, but we know that the returns are well worth it.

Europe revenue grew 81% year-over-year and is now $70 million on an annualized run rate basis, which is nicely ahead of our expectations. Year-to-date, we have signed nearly $40 million in annualized revenue, which represents over 40% of our total year-to-date bookings, and is a really -- and is really strong, considering that we haven't even launched our Irish or Netherlands facilities, which will -- doubles the size of our portfolio in Europe.

We are developing over 50 megawatts across all the key European markets. Combined with the European capacity, once these projects are completed, we will have nearly 150 megawatts in Europe, which represents nearly 20% of our overall prospective footprint. As I mentioned, when we were launching our European expansion, I wanted Europe to be about 25% of our revenue in 3 years, and we are executing according to that plan.

Slide 7 provides an update on another substantial business that we have organically built from the ground up that also never seems to get much attention, which is our interconnection business.

Similar to our strength in the enterprise market, our interconnection business also seems to get overlooked. As of this quarter, it's generating $50 million of annual revenue, and it grew 24% year-over-year, which I believe is the fastest-growing interconnection business in the industry.

We have seen consistently strong growth in our IX business, which is the result of a noticeable change in data center network topology that is under way. The change in topology is being driven by the growing importance of compute and storage nodes. In the early days of the Internet, eyeball acquisition was the primary motivator for companies that were looking to distribute their product to customers over the Internet, which, in turn, placed a high value on establishing interconnected data centers.

However, what we are seeing now is that data is becoming the new gold of the Internet. And as data sets become so large, they are becoming these digital black holes that continue to grow at an exponential rate. The network nodes that dominated the growth of the data center industry for the first 30 years are becoming less relevant, and we believe will be subsumed into hyperscalers' compute and storage nodes, which will be where the next wave of Internet value creation comes from.

All of the potential value creation that people believe will be generated from artificial intelligence will primarily be generated in the compute and storage nodes of the data center and, to a lesser degree, in the network nodes. This is a trend that has just started, and we believe will only accelerate over the next 5 years, playing to CyrusOne's core competencies of building massively scaled low-cost data centers.

The recent development we have announced in Iowa is a validation of this trend, whereby we will build an enterprise data center at close proximity and connected with a direct fiber path to a leading hyperscale -- hyperscalers' compute and storage nodes, which will be used for hybrid cloud deployments. It will bypass an interconnection facility, driving significant improvements in performance, cost and security for these developments, making it a very attractive value proposition for enterprises, particularly those with the massive data sets I referenced earlier.

Turning to Slide 8. We have been showing these property-level development yields for years, including the past several quarters. This quarter, we wanted to highlight Austin III, which has 60,000 square feet of raised floor and additional capacity for growth. It was commissioned in the fourth quarter of 2015 and the yield progression is very similar to the yield progression of the other facilities on this slide that we have shown recently.

All of these started negative when we delivered the initial capacity and were in a lease-up phase and, over time, they progressed to the mid- to upper teens range. This is the trend we have seen throughout our markets for years, and it's the reason we continue to make investments across the portfolio as they are highly accretive. I continue to share these development yields slides every quarter as I think it's important for investors to understand the yield progression of our properties.

We continue to invest in organic growth and expansion activities, with 13 expansion projects across 10 markets and 5 countries. These projects will initially generate negative yields. But in every investment we have shown, the yields turn positive and start generating great returns, and we expect that trend to continue. I would point out that, excluding acquisition-related funding, 100% of the equity raises we have done over the past 24 years has -- 24 months has produced massive value creation for shareholders despite the initial dilution.

Our investment in ODATA has meaningfully increased in value as the company has gone from having 2 megawatts of contracted power to more than 14 megawatts and still remains in the early stages of expansion. Ricardo and the team have ambitious goals expanding outside of Brazil, more recently into Colombia and most recently into Mexico.

Similarly, we have also created tremendous value by our GDS partnership, which continues to be the fastest-growing data center company in the world. William and the team are managing an incredible ride over there, trying to stay on top of really strong growth rates.

Slide 9 highlights the significant outperformance for the quarter compared to the peer data center REIT group and the broader REIT universe. We are growing in the 20% range across all of our key financial metrics, which is 3x faster than our peers and substantially faster than other REITs. The reason we have consistently been delivering industry-leading financial performance is because we have methodically and consistently invested a substantial amount of capital, in line with the customer demand we are generating.

This quarter, you are seeing the convergence of our FFO per share growth with revenue and EBITDA growth, which is the result of the incremental operating leverage we generate as our initial developments, which are all essentially equity funding, get sold out, which drives significant value creation across our assets, as I highlighted on the previous slide. Given that we currently have the capacity to triple the size of our footprint with powered shell and land inventory, we should be able to generate additional value for customers for years.

The last thing that I want to discuss is the achievement of being given an investment-grade rating. For those of you who have been involved with CyrusOne since our IPO, you know that one of my objectives has always been to obtain an investment-grade rating. This was something that I had in my original business plan that I developed 10 years ago, and it's the only objective from that plan that I hadn't achieved. In fact, we have exceeded every other financial and operational objective by a large margin, except for getting an investment-grade rating, so this is something that is personally one of the most rewarding accomplishments we have achieved, basically because it's taken us so long to do it.

As I have mentioned in the past, all of our customers are concerned about the financial strength of their data center partners as they are entering 10- to 15-year contracts with us and need to know that their partners are financially secure as they are. For reference, there are only about 400 investment-grade companies in the country, so we're one of the few companies that have an investment-grade designation.

In closing, the business is firing on all cylinders. We had a tremendous leasing quarter and are sitting at $92 million in bookings year-to-date, so we've already achieved our $20 million to $25 million quarterly guidance for the year through the first 3 quarters.

Our decision to expand into Europe was clearly the right one as that business is growing very quickly, and you are now beginning to see the benefits of the investments we had made there. Combined with our business partnerships in Asia and Latin America, we have established ourselves as one of the very few providers that can meet our customers' needs across the world.

We are also in the strongest financial position in our company's history, which will support a robust set of growth opportunities while lowering our cost of capital. Lastly, in the quarter, we became the #1 best-performing REIT in the RMZ, as measured from the time of our IPO.

Before I turn the call over to Diane, who will provide more color on our financial performance for the quarter and update our guidance, I wanted to discuss some market rumors. As you may be aware, several media outlets have reported, and some of you have speculated, that we are in discussions with various third parties regarding a potential sale of the company. We are not currently pursuing a sale of the company. We remain focused on our strategy and creating long-term shareholder value. We do not intend to have any further comments on the recent media reports and market rumors but look forward to discussing our results for the quarter.

I will now turn the call over to Di. Thank you.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [4]

--------------------------------------------------------------------------------

Thanks, Gary, and good morning, everyone. As Gary mentioned, we had a great quarter with very strong financial and operational performance.

As Slide 11 shows, revenue and adjusted EBITDA grew 21% and 20%, respectively. Normalized FFO per share grew 18%. And as Gary indicated, this is a significantly higher growth rate compared to the broader REIT universe. Churn was again low at 1%, and we continue to trend toward the lower end of our 5% to 7% guidance range.

Turning to Slide 12. NOI grew 18% on an adjusted basis. The decline in the margin year-over-year was driven by higher pass-through metered power reimbursements as a percent of the total revenue, which results in 0 margin contribution. Adjusted EBITDA grew in line with NOI, and the increase in normalized FFO was driven primarily by the increase in adjusted EBITDA as well as lower interest expense.

Moving to Slide 13. We maintained a balanced geographic contribution across our markets. With the leasing success we have had in Europe and our continued expansion there, the contribution from those markets will continue to increase over time. The percentage of CSF leased for stabilized properties was down slightly compared to the prior year but remains high at 88% despite a 16% increase in capacity.

Turning to Slide 14. We have a robust development pipeline to support our strong leasing results, with projects across a number of our markets in both the U.S. and Europe. The pipeline is 45% pre-leased on a CSF basis, which is up significantly from the prior quarter. The overall portfolio will be roughly 25% bigger on a CSF basis compared to a year ago upon completion of these projects.

Moving to Slide 15. As Gary mentioned, we are thrilled to have finally achieved investment-grade status. S&P had upgraded our issue-level rating to BBB- a year ago, and with Fitch initiating coverage recently with a BBB- rating, we now have the 2 ratings we need for investment grade index eligibility to be able to access that market. Additionally, Moody's recently upgraded us to one notch below investment grade.

As you know, we've been focused on getting to investment grade for years. And in addition to the obvious financial benefits, there are also significant strategic benefits. Most importantly, it improves our access to capital, which is critical in a capital-intensive business, and ensures that we are able to take advantage of the secular demand trends in the coming years.

Unlike the high-yield market, the investment-grade bond market never shuts down. And in periods of economic distress or a recession, it will give us a significant strategic advantage since we can be opportunistic to potentially acquire assets at discounted prices.

As Gary also mentioned, it's very important to our customers, particularly the hyperscalers but also enterprise cost -- pardon me, companies, to know that they have partners that are financially sound and positioned to support their growth. They also want to know that the providers they ensure their mission-critical gear will be with -- be around for the long haul, and financial risk is just as important to them as the security and reliability of the data center infrastructure. It also, no doubt, will improve our profitability. And we estimate that we can achieve savings of at least 100 basis points as an investment-grade issuer compared to the high-yield market. Combined with our build cost advantage, this helps insulate us from aggressive pricing decisions by other providers.

Turning to Slide 16. We believe we had an investment -- a balance sheet of an investment-grade company for years. And now that we have finally reached that status, we will continue to manage our leverage in the mid-5x range to protect our rating. We ended the quarter at 5.4x net debt-to-last quarter annualized EBITDA. We have no near-term maturities, and we have nearly $1.3 billion in available liquidity.

We executed 2 swaps in the quarter to better position the business for the long term. First, we synthetically converted $500 million of our term loan maturing in March 2023 into more attractively priced euro-denominated debt, resulting in a nearly 200 basis point decrease in the average interest rate over the remaining term based on the current LIBOR and EURIBOR forward curves. This better aligns our long-term euro funding requirements with our expected growth in Europe over the next few years. Also, as a result of the inverted yield curve, we converted the remaining $300 million of this term loan tranche into fixed-rate debt, decreasing the interest rate on this tranche to approximately 2.5% and increasing the percentage of fixed-rate debt to 54% at the end of the quarter.

As we have mentioned in prior calls, now that we are investment-grade, we plan to increase the proportion of fixed-rate debt in our capital structure. We had $475 million outstanding on the revolver at the end of the quarter, but $450 million of that has been swapped to euro-denominated debt, totaling approximately EUR 400 million. We expect to term out that into long-term fixed-rate euro market debt by the end of this year.

We also plan to reevaluate -- we plan to evaluate refinancing our $1.2 billion in existing notes maturing in 2024 and 2027, which are at high interest rates, and we expect this will generate significant interest savings. Finally, we will also look to recast our credit facility at some point early next year.

Moving to Slide 17. Our backlog has more than doubled in size compared to the end of the second quarter to nearly $53 million. This includes approximately $5.5 million in revenue associated with a paid reservation expected to be exercised in the next 12 months. The backlog, combined with the full year impact of leases that have recently commenced, provides a nice baseline for continued revenue growth into next year.

Turning to Slide 18. We are slightly adjusting our guidance ranges, given we are closing in on year-end. We are decreasing the midpoints of the revenue and adjusted EBITDA ranges each by less than 1% primarily reflecting a pushback in commencement timing for a few deals as compared to our prior outlook.

We are increasing our normalized FFO per share guidance midpoint by $0.025 primarily as a result of lower interest expense that we had previously anticipated. Again, this is mainly driven by the impact of the swaps that I just described. Lastly, we tightened our guidance range for capital expenditures to the $900 million to $950 million range, given the projected development pipeline spending for the balance of the year.

In closing, we are very pleased with our results for the quarter, particularly having had one of the strongest and broadest leasing quarters in the company's history. Again, getting to investment grade was a significant step that was years in the making, and we are now in an excellent financial position to continue to prosecute our business model and expansion plans in the coming years.

Thank you for participating in the call, and we are now happy to take your questions.

================================================================================

Questions and Answers

--------------------------------------------------------------------------------

Operator [1]

--------------------------------------------------------------------------------

(Operator Instructions) The first question comes from Frank Louthan with Raymond James.

--------------------------------------------------------------------------------

Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [2]

--------------------------------------------------------------------------------

So I guess a question you may -- still may not comment, but you say you're not pursuing a sale. Just curious, does that mean you're not entertaining offers or definitively not for sale? And then can you comment a little bit on the revenue trajectory, go for -- for the back half and implies kind of flat to down for revenue. Can you give us some color on what's driving that?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [3]

--------------------------------------------------------------------------------

Yes. Frank, so my comments on the market rumors were just that -- we just felt it was appropriate to come out with a statement, but that's all I have to say on that point.

With regard to the revenue, look, I think we had a really strong quarter. And I get you on the guidance for the quarter, but -- for the second -- for the last quarter. But in general, I mean, we are up around 18%, 20% year-over-year. Of that, our organic growth was about 14%, so it was really strong for the quarter.

We took down our guidance a little bit, just to some of the delayed installments and bookings for the quarter. But we feel really good about where we're sitting right now, particularly as we head into '20 with the strongest backlog in a really long time.

--------------------------------------------------------------------------------

Frank Garrett Louthan, Raymond James & Associates, Inc., Research Division - MD of Equity Research [4]

--------------------------------------------------------------------------------

And just to clarify on your comments on when you said that you expect to see some more of the hyperscale activity in the back half, I think the market was maybe looking more front half. Does that mean bookings? Or does that mean the actual -- starting to get the revenue from what you've been booking? Or how should we think about that?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [5]

--------------------------------------------------------------------------------

Yes. We're still not there in terms of calling the turnaround for that market. I mean we're seeing clearly more activity in -- particularly this quarter for us, in Europe in particular. But at this point, we don't see that same frenzy really kind of turning around. If it does, that would be great. But we feel more that it's probably a second-half issue than it is a first-half issue, and I'm talking about bookings, not revenue.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [6]

--------------------------------------------------------------------------------

And Frank, to clarify -- if your -- to your comment on revenue being slightly down compared to second quarter, remember we had $17.5 million in equipment sales in the second quarter and only about $2.5 million this quarter. So that was really the swing, if you're looking at that trend.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [7]

--------------------------------------------------------------------------------

Yes. And we had called that out last quarter, so people should -- would know about that.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [8]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Operator [9]

--------------------------------------------------------------------------------

Our next question come from Simon Flannery with Morgan Stanley.

--------------------------------------------------------------------------------

Simon William Flannery, Morgan Stanley, Research Division - MD [10]

--------------------------------------------------------------------------------

Gary, on Council Bluffs, interesting concept. Can you just give us a little bit more background about how this all came about? And what visibility do you have into the demand profile or pre-leasing to get you committing to that build? Is this -- and is this a model that you could move into other markets with similar profiles?

And then, just Diane, just quickly on that paid reservation. Is this a client, a customer option to take this space? And is this something we are starting to see more of? And what gives you the confidence that they will execute that? So anything -- color on that will be great.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [11]

--------------------------------------------------------------------------------

Sure. Yes, I'll take the first part of the question, Simon. So yes, so this is a really interesting development for us. So we've been talking for a while now in terms of where we see the data center network topology changing so that the nexus of that for the next wave of this is more going to be focused around the compute and storage nodes, as these data sets get bigger and bigger and data becomes where the new gold is, and people start trying to monetize that. You're going to need larger and larger facilities for people to action upon that, particularly AI being one of the great applications there.

What we've done in that location is we're bringing on 4.5 megawatts of capacity. It's -- half of that capacity is sold out. The location of it is right along the 41st parallel. That is the major east-west Internet hubs, and that's why a lot of the big hyperscale data center companies are located along that parallel across the country, from Salt Lake back east.

So what we're looking at doing there is putting a data center in close proximity to some of the hyperscalers, bypassing an interconnection hub and allowing those enterprise companies to do a hybrid deployment where they would put a lot of their managed equipment in our facilities but then connect up to hyperscale data centers in close proximity. This is something that I think is going to continue to expand over time as the data sets get larger and larger.

We've been working on a number of different initiatives in Houston, in particular, for our oil and gas customers. Because what we are seeing is that the data sets that they're dealing with are just so massive that it's not really efficient for our customers there to put that data into a cloud because the ingress and egress fees going -- moving that data from and -- back and forth to the cloud is really prohibitively expensive. So we are expecting this type of topology to happen more and more as the data sets get larger over time.

And I'll turn the second part of the question over to Di.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [12]

--------------------------------------------------------------------------------

Yes. Regarding the paid reservation, we included it in our bookings but called it out that, at this point, it is just a paid reservation. It is with one of our top customers, and it's contiguous to an actual lease that will be commencing next year. So we feel it's a high probability that they would actually take this space, and it is at their option.

--------------------------------------------------------------------------------

Operator [13]

--------------------------------------------------------------------------------

Our next question comes from Jon Atkin with RBC.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [14]

--------------------------------------------------------------------------------

So yes, on the Council Bluffs topic. You've got Quincy, and then I guess you've got like Agriport A7. And do we think about those 3 in kind of the same vein around single tenant, or at least maybe multi-tenant hyperscale-type server farm deployments? Is that, in essence, what you're trying to do in all 3 locations?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [15]

--------------------------------------------------------------------------------

No. Actually, the Agriport facility in the Netherlands and Quincy was really more single-tenant hyperscale-focused. That's what -- that's who we believe -- well, we'll obviously sell to anyone. But the original underwriting was based on hyperscalers choosing those locations.

The Council Bluffs investment here is very different. This is to really establish an enterprise-focused data center going after the hybrid market, with the enterprise customers going in as well as cloud customers -- linking up to cloud customers' data centers so that they can get in close proximity to the hyperscalers' compute and storage nodes.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [16]

--------------------------------------------------------------------------------

Got it. And then just a couple of kind of cats and dogs. But JEDI contracts, and it's been awarded, but there's quite possibly a challenge coming. And I wondered kind of what your read is, having a significant presence in Northern Virginia, on how that might affect the sector.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [17]

--------------------------------------------------------------------------------

Sure. Yes. Look, I -- we'll see how this will work out. I mean the government works at a pace that is really, really slow. So I probably have a better shot of growing hair before that deal actually gets -- gets closed. But I think we're in a good position. I mean clearly, Microsoft won that contract. That is really good, particularly given that we're -- they're a big customer of ours. So we think we're positioned really well.

We've got about 130 megawatts of capacity that we are bringing under shell online, so we'll able to handle that to the extent that we were to win it. But I think, in general, it's a really good, healthy sign for the Northern Virginia market. Whether we get it or someone else gets it just means that a lot of the supply that is -- has been delivered there is going to get utilized, which I think is better for the market overall because, as I've said, I thought and still do that the Northern Virginia market is a bubbly market. I think -- and that is -- there's too much capacity there. It is overbuilt, so I think it's going to take some time to work through all the capacity that has been brought online there.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [18]

--------------------------------------------------------------------------------

The good news is...

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [19]

--------------------------------------------------------------------------------

So related to -- yes, go ahead, Diane.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [20]

--------------------------------------------------------------------------------

We have tremendous capacity, though, whether it be shell or to build out shell on 3 different campuses, to be able to accommodate, if there's leasing related to that contract.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [21]

--------------------------------------------------------------------------------

Yes. And in the past, we have done federally built data centers, so high-security data centers. We have a lot of experience building out those facilities as well.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [22]

--------------------------------------------------------------------------------

Related to that, I was wondering if you had any sort of updated observations on the behavior of unlisted entrants in markets such as Northern Virginia or even Phoenix or elsewhere in terms of pricing that they're showing to customers or their pace of development. Has any of that changed?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [23]

--------------------------------------------------------------------------------

Yes. So I think the pace of development has definitely slowed down, which is good. I think some of the pricing numbers that you're seeing tossed around is what people do when they're overextended. That they're willing to take pricing, that to me is just ridiculous. I think what you've seen in our pricing this quarter was really strong focus on appropriate return on capital. We walked away from a number of deals that we thought were just ridiculously mispriced.

Our hope is that some of the folks that were coming in and speculatively building out some of these facilities will stop that. And we think that if the continued hyperscale kind of slowdown in purchases continues, we think that there's going to be some of those other small players that are going to probably take a different strategic choice go forward.

--------------------------------------------------------------------------------

Jonathan Atkin, RBC Capital Markets, Research Division - MD and Senior Analyst [24]

--------------------------------------------------------------------------------

And then any update on Santa Clara?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [25]

--------------------------------------------------------------------------------

We're continuing to develop that property. That is going to be the largest data center campus in Northern Virginia -- I mean in Santa Clara. We won't have property online there to sell until the end of next year, at the earliest.

--------------------------------------------------------------------------------

Operator [26]

--------------------------------------------------------------------------------

Our next question comes from Robert Gutman with Guggenheim Securities.

--------------------------------------------------------------------------------

Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [27]

--------------------------------------------------------------------------------

So $23 million in enterprise. You'd mentioned last quarter, I believe, a 5-megawatt deal that had been signed after second quarter end, I think it was San Antonio, with another potential 5 megawatts behind it. And I'm wondering if that seems to be part of it. Plus, if you add in the -- I think you said, 2 or 2.5 megawatts in Iowa. I'm assuming you're counting that as enterprise, too. So that...

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [28]

--------------------------------------------------------------------------------

No. No.

--------------------------------------------------------------------------------

Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [29]

--------------------------------------------------------------------------------

No? That's not being counted as enterprise?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [30]

--------------------------------------------------------------------------------

No, that's not in enterprise.

--------------------------------------------------------------------------------

Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [31]

--------------------------------------------------------------------------------

Okay. But then, in total, was all the enterprise in the U.S.? Or was any of that in Europe?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [32]

--------------------------------------------------------------------------------

Yes. There was a little bit in Europe, but it was predominantly U.S. And you're spot-on for San Antonio. That was a big win for us at the beginning part of the quarter. And again, there, I mean, this is just kind of a validation of how important that investment-grade rating is. While we didn't have it then, we spent a lot of time with that particular customer with -- going through financial diligence on us. They wanted to make sure that there was a partner that they were working with that was going to be around for a while, and they decided to go with us.

And this was when we were out of capacity, so we agreed to go build this facility for them. And they decided that it was in their interest to wait for us to go deliver that facility, basically because they liked our financial position versus some of the other folks that they were looking at doing. That's why we're really excited about what the IG rating will do for us, more so in the future as the likelihood of recession kind of comes further into view. We're heading into that with a stronger balance sheet is something that I think is going to be much more important for our customers go forward.

--------------------------------------------------------------------------------

Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [33]

--------------------------------------------------------------------------------

Great. Then one other -- oh, sorry, go ahead.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [34]

--------------------------------------------------------------------------------

Bob, just to provide a little more color. And Gary said this in his formal remarks, but it was such a broad leasing or bookings quarter. And yet, there wasn't like one huge deal that skewed it. The largest lease as they said was 5.5 megawatts. Almost 80% of the MRR was greater than 500 kilowatts, so it was a nice -- a broad blend of between the 500 kilowatts and 5.5 megawatts. And at the ones over 500 kilowatts, roughly 25% of that was enterprise. So again, really, really nice mix that we hope to see continue.

--------------------------------------------------------------------------------

Robert Ari Gutman, Guggenheim Securities, LLC, Research Division - Senior Analyst [35]

--------------------------------------------------------------------------------

Great. Can you also just update us on the near-term availability for leasing in Europe based on what you've delivered and what's coming online near term?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [36]

--------------------------------------------------------------------------------

Sure. Yes. We've got plenty of capacity available and more coming online in London. Frankfurt is our tightest market. We're effectively sold out. We're bringing on capacity that we'll have online there. Right around June, July next year, we'll have a couple of megawatts available to sell. After that, we're looking at securing another property there.

Amsterdam, we'll have online at the end of this quarter at 4.5 megs. Of that, we sold out a couple megs, of that, 3-or-so megs was [out already]. So we've got a little bit left. Still working through some of the nitrous oxide emission issues in Amsterdam -- or Netherlands as well as the moratorium in Amsterdam, but we think we're in a good position there.

Dublin is coming online, and we'll have plenty of capacity there. That will be delivered, I think, in the third -- beginning in the third quarter of next year as well. So we feel like we're in a really strong position heading into next year. Our hope is that this Brexit issue gets settled out and people get back to buying. London has obviously been the weakest market in Europe, and I think, to a big degree, it's because of all of the concerns around Brexit.

--------------------------------------------------------------------------------

Operator [37]

--------------------------------------------------------------------------------

The next question comes from Erik Rasmussen with Stifel.

--------------------------------------------------------------------------------

Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [38]

--------------------------------------------------------------------------------

Maybe just on European topic, and then you've kind of talked a lot about the development and some opportunities in a lot of those markets and bringing on capacity. But looking at then sort of CapEx, so this year or this quarter, you just -- you bumped it up a little bit. How should we be thinking about, though, the level of CapEx heading into 2020, obviously measuring future demand and having capacity in land, bank availability to kind of meet a lot of that future demand and some of the things you just talked about?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [39]

--------------------------------------------------------------------------------

Yes. I'll take that one. So we're not in a position to give guidance for 2020 on any of the metrics, including CapEx, and we will do that on our February earnings call. And clearly, our capital spend is based on the success of our leasing. And we clearly had a very strong lease -- or bookings quarter, which will factor into our capital budget going into next year. I think it's important to point out also, we remain committed to continue to grow in our 4 European markets as well as Santa Clara, but we will give guidance in February.

--------------------------------------------------------------------------------

Erik Peter Rasmussen, Stifel, Nicolaus & Company, Incorporated, Research Division - Analyst [40]

--------------------------------------------------------------------------------

Okay. And maybe then my follow-on, on the leasing front, seems like deal sizes are increasing. And I think in the slide deck, it seemed like a good percentage, over 3/4, are greater than the 500 kw. Is this sustainable? Is this a sustainable number? Or do you think deal sizes revert back to maybe closer to the average? Maybe just any sort of color there would be helpful.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [41]

--------------------------------------------------------------------------------

Yes. Look, this quarter, in my mind, was really, really good because of the broad amount of deals we did. So as I mentioned to one of the earlier callers, I mean, our biggest deal in the quarter was only 5 megs. And typically, when we've had these type of record quarters, there's always been a really big deal, like a 20- or 30-meg-type deal that was really skewed it. What was great about this was that the biggest deal was 5 megs. We did 1 megawatt in several different markets across the country and in Europe, so it shows about the diversity of that.

The other thing is that our IX business was really strong. That was up 24% year-over-year, which is a really, really great number. I mean it's a $50 million run rate business. And the other thing is just half of that sale this quarter was for the enterprise. I mean $23 million in enterprise bookings was by far and away the biggest quarter we've ever had.

So that was a really strong quarter without the typical hyperscalers in there, where they had -- we had some hyperscalers in there, but they were taking small amounts of capacity. That's why we think we're positioned really well for next year. We expect that the hyperscale market is going to turn around. And given where we're sitting from an inventory perspective, we're going to be able to respond quickly to close a lot of those deals that we expect are going to come back around.

--------------------------------------------------------------------------------

Operator [42]

--------------------------------------------------------------------------------

Our next question will come from Colby Synesael with Cowen and Company.

--------------------------------------------------------------------------------

Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [43]

--------------------------------------------------------------------------------

So a few questions. One is I know you're not obviously giving guidance for 2020. But Diane, in the past, you had mentioned on calls this quarter that you guys generally expect to see mid -- excuse me, mid-teens revenue and EBITDA growth next year and I believe low double-digit FFO per share growth. I'm wondering if you could at least just reaffirm that.

And then secondly, you talked a lot about pricing, which I greatly appreciate. I know that you guys aren't chasing those deals and, as a result, you walked away from some you mentioned this quarter. But I'm curious what your expectations are as it relates to renewal spreads on your current business, call it, over the next year. I can imagine many of those customers are going to look for a reduction in price, and you're either going to have to go in and match what they're asking for or risk them potentially leaving. So I'm curious how you're going to approach that.

And then lastly, just curious what the company's interest is in terms of expansion outside of Europe. You've obviously done really well, kind of following the bouncing ball, if you will. Curious how important it is to be in even more markets over the next, call it, medium term as you go into, call it, 2020 and '21.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [44]

--------------------------------------------------------------------------------

Sure. I'll take the last 2 questions and Di can take the first. But with regard to where we're going to go in new markets, I mean, we continue to look at different markets throughout Europe. When we went into Europe, we went in to build a big presence there. We are in 4 of the key markets right now. There is clearly one of the other flaps that we're not in now, so you should look for us to continue to look for expansion there and a couple of the other markets as we build out our portfolio. Again, it's all relative to the customer demand that we're tracking, the conversations that we're having with customers. And that really kind of dictates where we go and the pace at which we're going to deploy that capital.

With regard to pricing, I mean, look, this is -- on renewals, I mean, that has been a trend that we have seen for many, many years, and we've been managing through this for -- since we've gone public, right? And having a -- this concern about other people coming in and lowering their price, I mean, it's something that you've had to deal with. The reality though is, is that it's really difficult for customers to move. And while the cost, the rental cost that we're going to charge them for the space is one part of their overall bill of material that they're paying each month, it's actually probably the most insignificant part relative to all the other expenses that they have for that data center.

And so while they could potentially get a lower price elsewhere, there's a lot of risk in moving it, a lot of additional capital required to do it efficiently, and we kind of manage through that.

I think for some of those companies that are out there offering that pricing which I think is pretty remarkable, I think those companies longer term aren't in business for the long term because it's hard to sustain adequate returns at those levels. And I think the concern that I have for the customers that went in there is whether they have a partner that is going to be around for the long term. And clearly, we've been focused on the long term since we've built this business. That's why we've never taken short-term decisions and stretched our balance sheet. We've always maintained really solid leverage in order to get investment-grade rating because we're building this company for the long term.

So you're going to win some deals, you're going to lose some deals. But I think what you saw this quarter is we've won more than our fair share of deals and took a tremendous amount of market share even when we walked away for some of those deals that were pretty ridiculous.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [45]

--------------------------------------------------------------------------------

And on our actual renewals that signed this quarter, it was basically flat -- up a little.

--------------------------------------------------------------------------------

Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [46]

--------------------------------------------------------------------------------

Is that GAAP or cash?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [47]

--------------------------------------------------------------------------------

That is GAAP.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [48]

--------------------------------------------------------------------------------

That's GAAP.

--------------------------------------------------------------------------------

Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [49]

--------------------------------------------------------------------------------

Was cash the same?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [50]

--------------------------------------------------------------------------------

Well, GAAP and cash...

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [51]

--------------------------------------------------------------------------------

No. Probably down. I don't really -- we didn't look at that, but it's probably down. I don't know what the duration of those were.

--------------------------------------------------------------------------------

Colby Alexander Synesael, Cowen and Company, LLC, Research Division - MD & Senior Research Analyst [52]

--------------------------------------------------------------------------------

And then on the guide or the color for 2020. Just reaffirming what you said before?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [53]

--------------------------------------------------------------------------------

Well, for 2020, we're not giving guidance. And obviously, so much of what will drive it is when leases commence. Bookings were lighter in the first half, but it's picked up. So that will come in over time next year. So it's -- we're just not in a position to give guidance for 2020.

--------------------------------------------------------------------------------

Operator [54]

--------------------------------------------------------------------------------

The next question comes from Sami Badri with Crédit Suisse.

--------------------------------------------------------------------------------

Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [55]

--------------------------------------------------------------------------------

I just have some quick ones and then I have some other questions. The quick ones are what were the percentage of revenues from direct efforts with your sales force to customers versus what came in through value-added resellers in the quarter?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [56]

--------------------------------------------------------------------------------

Yes, 100% this quarter. 100%.

--------------------------------------------------------------------------------

Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [57]

--------------------------------------------------------------------------------

100% direct? Okay. The other one is how many cross-connects did you guys have at the end of the quarter?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [58]

--------------------------------------------------------------------------------

I don't know.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [59]

--------------------------------------------------------------------------------

Schafer can give you that detail.

--------------------------------------------------------------------------------

Michael Schafer, CyrusOne Inc. - VP, Capital Markets & IR [60]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [61]

--------------------------------------------------------------------------------

Okay. The longer question is you -- in your prepared remarks, you mentioned European leasing was driven by U.S. hyperscale. Is this tracking above or below your expectations? Because I know the metric or the hurdle rate we were discussing a while back was about 70% of potential activity in Europe was going to come from U.S. hyperscale customers or just U.S. customers. Are we above or below the 70% hurdle rate?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [62]

--------------------------------------------------------------------------------

Oh, yes, we're above. So Sami, when we went into Europe, we assumed that 100% of -- basically 100% of all of our underwriting assumed, all the growth there initially was going to come out of the U.S. relationships that we have in predominantly hyperscalers. That's turned out to be exactly the case. However, what we've also mentioned is that we're planning on building out an enterprise book and sales force attacking a market. That is difficult to do. It's a really long sales cycle. And we have really done a nice job in building out that portion of our sales funnel in the enterprise space. So we expect that we're going to continue to do work there. But -- and eventually, that's going to turn into -- do nice business, but that was never our underwriting going in. So far, it's turned out exactly as we anticipated. It's mostly U.S. hyperscalers there.

--------------------------------------------------------------------------------

Ahmed Sami Badri, Crédit Suisse AG, Research Division - Senior Analyst [63]

--------------------------------------------------------------------------------

Great. Got it. And then last question for you is on Page #8 regarding the development yield. So if we were to look at these development yields and we split this up into 2 buckets, colocation or traditional power and cooling and interconnectivity and IX, what percentage of revenues for these facilities is coming from IX as of the last quarter, as of these high-point development yields?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [64]

--------------------------------------------------------------------------------

Yes. So 5% of our overall revenue is IX. So you can -- you get some flavor for that. So I mean if it's broadly distributed, I mean probably, there's less of an IX component in Austin than there is in some of our other facilities. So it's not really a big driver. The bigger driver is just kind of the blended basis between the enterprise companies and the hyperscalers that we put in those facilities.

--------------------------------------------------------------------------------

Operator [65]

--------------------------------------------------------------------------------

Our next question comes from Nick Del Deo with MoffettNathanson.

--------------------------------------------------------------------------------

Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [66]

--------------------------------------------------------------------------------

First, Gary, can you expand a bit on what underpins the view that hyperscale will come back in the second half of 2020? Is that just based on customer discussions and then kind of describing the road maps? Or are there other inputs? And you're either talking globally or just the U.S.?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [67]

--------------------------------------------------------------------------------

Yes. No, it's predominantly a U.S. commentary. I mean we are seeing really strong demand in Europe, not of the same scale that we are seeing in the U.S. So the commentary is predominantly associated with U.S. demand. And it's based on just conversations, right? We spend a lot of time meeting with all the customers, sitting down with them, talking to them about their needs, where they're going to need it. And the art comes in terms of trying to understand like how focused they are on needing capacity quickly. And while there's a lot more conversations about their need for capacity in different markets now, it's not nearly at the pace it was a while ago. And so we're still not ready to call that, that market is going to turn around anytime soon. If it does, that would be great, but we're not planning on that for 2020 yet.

--------------------------------------------------------------------------------

Nicholas Ralph Del Deo, MoffettNathanson LLC - Analyst [68]

--------------------------------------------------------------------------------

Okay. Got it. And then maybe switching gears a bit. You oftentimes complain that the market kind of systematically underappreciate the value of your expansion opportunities. That's probably part of what fueled expectations you might want to go private. I guess are there rules of thumb that you use yourself to assess that expansion option value when you think about what your stock is worth that might be worth sharing?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [69]

--------------------------------------------------------------------------------

Yes. Well, look, I mean, we've got about close to $1 billion of investments on our balance sheet if you take the CIP and some of the GDS investments that we have there. And so that's roughly $10 per share. And so if you think about that relative to whatever number you're going to put, if you put a 15% return on it, you're looking at a 15% return on $1 billion of investment, that's a substantial amount of growth. I mean relative to -- we generate roughly $600 million of NOI, [15% is 25%] up. So you're looking at a pretty substantial potential value creation on that even on a growth adjusted basis. Even if you just look on a book basis, it's worth $10 a share. So I don't know how people value.

I think in general, I think most dedicated real estate investors do not ascribe a lot of value to developments. And I think that's with good reason because most real estate asset classes don't really have the networking effect associated in their business that we do, right? If you look at our business, 75%, 80% of our business is generated from customers that are in more than one location. And what we have seen since inception has been once you get a customer in the door, the growth rate that you could see from that customer is over a 20% CAGR. So I can see in some other real estate industries why there's not really the same networking effect so they don't ascribe a lot of value to their development business. That is absolutely not the case in this business at all.

When I think about our business and the development aspect of it, that's where I see all of the potential value creation coming from. I mean we're sitting here in a position now, and what we've just demonstrated this quarter is we just launched into Europe and we just leveraged all of our U.S. relationships with all of our customers over here after having gone into that -- into an entirely new continent in one year. And it's played out exactly as we envisioned. And that's why we were comfortable going into 4 different markets there because that's exactly how the company has been built from the ground up since inception. We started in one market in Houston or Cincinnati and just kept growing methodically, organically over time, and we built a really nice business. And so when we expand in these other markets, we did it with the expectation that we're going to be able to bring our customers there. It turned out exactly true, and that's why we feel really confident about our ability to continue to deliver capacity and make the returns that we've done over a really long, sustained period of time.

--------------------------------------------------------------------------------

Operator [70]

--------------------------------------------------------------------------------

The next question comes from Ari Klein with BMO Capital Markets.

--------------------------------------------------------------------------------

Aryeh Klein, BMO Capital Markets Equity Research - Analyst [71]

--------------------------------------------------------------------------------

Gary, can you talk to the visibility you have in the pipeline and the timing on deals? It doesn't seem like you're expecting this kind of leasing performance just 90 days ago. So what kind of played out differently than you were expecting?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [72]

--------------------------------------------------------------------------------

Yes. Well, some of that is we had a really bad quarter last quarter, right? I mean that was a weak quarter for us. We had $13 million in the quarter, which was the lowest we've had in several years. Fortunately, we closed out one deal right at the beginning of July. So if you look at that, it was like a $26 million quarter.

So if you back off the $13 million from the $52 million, we're up about 50% above where we were expecting to be. And that was, again, it's just the number of deals that we were focused on trying to close, I think it got accelerated. I would not expect and don't -- no one should assume that this level of performance is going to be repeated again next quarter. We feel good that we're basically ahead of our annualized bookings number, which was between $80 million and $100 million for the year. But we expect next quarter it's going to get back down to a much lower number than it was this quarter. It worked out well, that everything kind of came together this quarter, and we closed a really big number of deals.

--------------------------------------------------------------------------------

Aryeh Klein, BMO Capital Markets Equity Research - Analyst [73]

--------------------------------------------------------------------------------

Got it. And then I think you mentioned potentially building more enterprise- and IX-focused data centers in Europe. To what extent can you look for acquisitions there versus development?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [74]

--------------------------------------------------------------------------------

Yes. Look, I mean it's difficult. There's not many properties out there, I mean, or platforms out there that you can acquire. And that's why we're going the organic path. It's a little slower, but we know the returns that we're going to make on it are going to be better. We can control the quality of the product, and the whole integration to our system is a lot easier when you do it from the ground up. Clearly, we'll look for other assets that become available. But the reality has been a lot of these deals have just gone at multiples that are just not attractive to us. I mean they're really, really expensive, and we can't afford to play at that level and we've decided to take a pass on that.

We saw last year, I mean, we were under a lot of pressure in the first quarter last year predominantly because of the Zenium acquisition, which was very dilutive as well as some of the expansion that we're doing. And what you just saw this quarter is that our revenue for Zenium is up 80% and our EBITDA is up over 100%. And we're now starting to get the benefit of that acquisition with those assets that we acquired plus with the additional organic developments that we're putting around it to complement it.

--------------------------------------------------------------------------------

Operator [75]

--------------------------------------------------------------------------------

The next question comes from Richard Choe with JPMorgan.

--------------------------------------------------------------------------------

Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [76]

--------------------------------------------------------------------------------

I just wanted to clarify a little bit. Given the, I guess, the bookings this quarter but backing out the earlier deal and the strength in Europe. Can you kind of go back to what the enterprise business in the U.S. is looking like and what you're seeing there? And kind of to follow-on with that, can you sustain, I guess, given the new business mix and with hyperscale being pushed out, the $20 million to $25 million in bookings a quarter? Or does that need to be reset downward?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [77]

--------------------------------------------------------------------------------

No. I think the $20 million to $25 million a quarter is a good estimate that we should be able to continue to deliver on. I think once the -- some of the hyperscalers come back in the market again, I think you're going to get quarters like this one where you're going to get a big deal that's going to pop and it will basically go over that number. But if you look over the last 4 or 5 quarters, we've been putting up that $20 million to $25 million a quarter, and that has been predominantly focused on the enterprise business. We've had record quarters in enterprise sales over the last couple even in spite of just kind of muted demand from the hyperscalers. So once the hyperscalers come back, I think we'll be able to do above that, but we're not willing to call that turnaround just yet.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [78]

--------------------------------------------------------------------------------

And again it varies so much by quarter, just comparing second quarter and third quarter. So it's -- you can't -- that's why we say more the baseline of the $20 million annualized just feels pretty reasonable.

--------------------------------------------------------------------------------

Yong Choe, JP Morgan Chase & Co, Research Division - VP in Equity Research [79]

--------------------------------------------------------------------------------

And I guess asking along with that, but the pipeline for the enterprise deals in the U.S. remains robust? Or is it more in Europe? Or can you give a little differentiation there?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [80]

--------------------------------------------------------------------------------

Yes. No, the enterprise deals are almost all predominantly U.S. We've got that funnel building in the U.S. for the enterprise business. But to date, all the bookings for the most part on the enterprise have been in the U.S. In aggregate -- I didn't even actually mention this in my point, but our funnel -- and this is -- I didn't even have it in my prepared remarks, but our funnel is down a couple percent, like 2% or 3%, versus last quarter and it's down around 14% or so from last year. So typically, I give that in my prepared remarks, but I forgot to do that. That'd give you some color on the quarter from a funnel perspective.

--------------------------------------------------------------------------------

Operator [81]

--------------------------------------------------------------------------------

The next question comes from Michael Funk with Bank of America Merrill Lynch.

--------------------------------------------------------------------------------

Michael J. Funk, BofA Merrill Lynch, Research Division - VP [82]

--------------------------------------------------------------------------------

A couple of quick ones, if I could. We've been hearing that due to some of kind of the trade tensions, maybe there was some slowdown or a delaying in some of the deals coming from Asia over into the U.S. from some of the hyperscale guys over there. So wonder if you're still seeing that and if you expect a recovery there in 2020.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [83]

--------------------------------------------------------------------------------

Yes, we absolutely have. I mean that business was going really strong. It's dramatically slowed down over the last couple of quarters. Your guess is as good as mine as to when both governments can work out a trade deal. I've always been an optimist. I've always thought both of the presidents are very commercial. So I think they both want to get a deal done. So I'm hopeful that they will.

--------------------------------------------------------------------------------

Michael J. Funk, BofA Merrill Lynch, Research Division - VP [84]

--------------------------------------------------------------------------------

And then, Gary, back to your earlier comments about not pursuing anything at this time. I appreciate you wanted to clarify things given all the press. But just wondering if you were trying to take control of the narrative in the front of what might be a kind of a history of deal, one that was just announced recently. And if your comments about taking a pass implies that you have been part of a process and have been looking and maybe just stepped away because of valuation, as you noted. And then kind of second part to the question I guess would be, do your comments imply that you're not open to a sale? Because I've always kind of thought, I guess, any company's for sale at the right price or just that there's not a process going on right now?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [85]

--------------------------------------------------------------------------------

Yes. Look, Mike, I mean there were so many news releases that got out that we felt it appropriate to kind of put out a statement to kind of, just kind of bring some clarity to that. And I think my comments in there were pretty much spot-on, and that's really what we wanted to get across to everyone.

--------------------------------------------------------------------------------

Michael J. Funk, BofA Merrill Lynch, Research Division - VP [86]

--------------------------------------------------------------------------------

Okay. Thank you for clarifying. And then final question, we have another call starting here in a second. Just on capital needs, Diane. How do potential JVs fit into your capital needs? And you've kind of commented on the potential need to raise equity the last few quarters, saying that you don't have any need of it near term. Just wondering if you can just update that commentary.

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [87]

--------------------------------------------------------------------------------

Yes. Nothing really to comment on in the JV category. And as I mentioned in my prepared remarks, we'll continue to manage our leverage in the 5.5x range. That's what we've committed to the rating agencies in order to protect our investment grade. And I think it's fair to say that as we've done in the past, we expect to opportunistically utilize our ATM to issue equity to manage to that leverage range and fund the development pipeline depending ultimately on what our capital expenditure needs are.

--------------------------------------------------------------------------------

Operator [88]

--------------------------------------------------------------------------------

Our next question comes from Jordan Sadler with KeyBanc Capital Markets.

--------------------------------------------------------------------------------

Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [89]

--------------------------------------------------------------------------------

Sorry to press on this, but I feel like it's really not entirely clear. You said you're not currently pursuing a sale. But is it fair to say from your commentary that you assessed some offers and ultimately decided it's just better to be a public company? And this...

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [90]

--------------------------------------------------------------------------------

I think in the last quarter we got the same questions, and we told everyone there was no comment on it. There were a bunch of subsequent news reports and releases and speculation on it. We want to provide some clarity, which was what we attempted to do again to say basically, no comment on it. But actually more affirmative to say that there's no deal here. And I don't think we could be any more clear than that.

--------------------------------------------------------------------------------

Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [91]

--------------------------------------------------------------------------------

Okay. Not running a process.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [92]

--------------------------------------------------------------------------------

Yes.

--------------------------------------------------------------------------------

Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [93]

--------------------------------------------------------------------------------

And then -- I appreciate that. And then in terms of the any other comment on the different M&A transaction that was in market this week. Any thoughts on sort of how that might impact the competitive dynamic in Europe?

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [94]

--------------------------------------------------------------------------------

Yes. Well, I think that's a great deal. I think Bill got a really great asset there, and it was great to see Dave willing to do that. I think in general, losing Dave ultimately as a competitor is good for us, right? I mean he's a great competitor in the market, and having one less company in the European market is going to be good, I think, for us. I think in general, what you saw when Digital acquired DuPont and there was one less player in Northern Virginia, that -- we benefited by that. I'm expecting that we'll continue to do well in Europe basically because a lot of the customers want to spread around their purchases so that they don't want to be so wedded to a particular player. So I think in general, it's going to benefit us. But I think also that Digital is going to do phenomenally well. Interxion is a fantastic asset.

--------------------------------------------------------------------------------

Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [95]

--------------------------------------------------------------------------------

Fair comment. And then just Diane, back to the financing and funding. We spent -- you guys spent a lot of time and money on investment-grade rating, congratulations. How have you communicated your prospective funding of growth to the rating agencies? In other words, what's the expected mix of debt and equity? And what's the upper end of the net debt-to-the EBITDA threshold?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [96]

--------------------------------------------------------------------------------

As I said, we committed to managing in the mid-5x range, and that's what they expect from us. So the math works out to pretty similar capital structure regarding percent of equity and percent of debt to our current balance sheet because we ended the quarter at 5.4x net debt-to-EBITDA. Now over time obviously, our EBITDA grows, so we create more leverage capacity through that. But as far as where we're managing to, that's where we're managing to.

--------------------------------------------------------------------------------

Jordan Sadler, KeyBanc Capital Markets Inc., Research Division - MD and Equity Research Analyst [97]

--------------------------------------------------------------------------------

So it sounds like you softened up a little bit on the view toward equity, right? I mean I feel like earlier in the year, you kind of -- maybe it was the stock price. You guys kind of waved it off and said, "Look, we don't need equity, we're going to internally fund." It doesn't sound like you're saying that right now per se. Or am I missing it?

--------------------------------------------------------------------------------

Diane M. Morefield, CyrusOne Inc. - Executive VP & CFO [98]

--------------------------------------------------------------------------------

Well, earlier this year...

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [99]

--------------------------------------------------------------------------------

No. I would -- I mean, I'd weigh in on that, Jordan. So getting investment grade is something that we are absolutely going to protect. There's only 400 companies that have an investment-grade rating, and now we're going to be one of them. And so the strategic importance of having that particularly as we head into an economy that is kind of slowing down is going to be really important. So you should assume that we're always going to do the right thing for the long-term interest of the company. And if that requires getting equity in there, that's what we'll do.

--------------------------------------------------------------------------------

Operator [100]

--------------------------------------------------------------------------------

This concludes our question-and-answer session. I would like to turn the conference back over to Gary Wojtaszek for any closing remarks.

--------------------------------------------------------------------------------

Gary J. Wojtaszek, CyrusOne Inc. - President, CEO & Director [101]

--------------------------------------------------------------------------------

Great, everyone. Thanks for joining in the call. We'll see you in a couple of weeks at NAREIT. And if you have any other questions, don't hesitate to reach out to Schafer or Berry. They're here. Take care.

--------------------------------------------------------------------------------

Operator [102]

--------------------------------------------------------------------------------

The conference has now concluded. Thank you for attending today's presentation. You may now disconnect.