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CYRUSONE INC. - 10-Q - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS(Edgar Glimpses Via Acquire Media NewsEdge) This Report on Form 10-Q (this "Quarterly Report"), together with other statements and information publicly disseminated by our company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended (the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions. In particular, statements pertaining to our capital resources, portfolio performance, financial condition and results of operations contain certain forward-looking statements. You can identify forward-looking statements by the use of forward-looking terminology such as "believes," "expects," "may," "will," "should," "seeks," "intends," "plans," "pro forma" or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify as a REIT; (x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in real property tax rates; (xii) delays or disruptions in third-party network connectivity; (xiii) service failures or price increases by third party power suppliers; (xiv) inability to renew net leases on the data center properties we lease; and (xv) other factors affecting the real estate industry generally. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2012. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Presentation References in this Quarterly Report to "Successor" refers to the Company on or after January 24, 2013 and "Predecessor" are the results prior to January 24, 2013. The Predecessor results have been prepared on a "carve-out" basis from CBI's 19 -------------------------------------------------------------------------------- Table of Contents consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to the data center business and include allocations of income, expenses, assets and liabilities from CBI. These allocations reflect significant assumptions, and the combined financial statements do not fully reflect what the financial position, results of operations and cash flows would have been had CyrusOne been a stand-alone company during the periods presented. As a result, historical financial information is not necessarily indicative of CyrusOne's future results of operations, financial position and cash flows. The related financial statement tables will be presented showing the statements that relate to the Predecessor as well as the Successor. The results of both the Predecessor and Successor are presented separately but will be discussed on a combined basis for comparability purposes. Overview Our Company. We are an owner, operator and developer of enterprise-class, carrier-neutral data center properties. Enterprise-class, carrier-neutral data centers are purpose-built facilities with redundant power, cooling and telecommunications systems and that are not network-specific, enabling customer interconnectivity to a range of telecommunications carriers. We provide mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure for over 500 customers. Our goal is to be the preferred global data center provider to the Fortune 1000. As of March 31, 2013, our customers included nine of the Fortune 20 and 119 of the Fortune 1000 or private or foreign enterprises of equivalent size. These 119 customers provided 76% of our annualized rent as of March 31, 2013. We cultivate long-term strategic relationships with our customers and provide them with solutions for their data center facilities and IT infrastructure challenges. Our offerings provide flexibility, reliability and security and are delivered through a tailored, customer service-focused platform that is designed to foster long-term relationships. We focus on attracting customers that have not historically outsourced their data center needs. We believe our capabilities and reputation for serving the needs of large enterprises will allow us to capitalize on the growing demand for outsourced data center facilities in our markets and in new markets where our customers are located or plan to be located in the future. Our Portfolio. As of March 31, 2013, our property portfolio included 24 operating data centers in ten distinct markets (Austin, Chicago, Cincinnati, Dallas, Houston, London, Phoenix, San Antonio, Singapore and South Bend), collectively providing approximately 1,709,000 NRSF, and powered by approximately 248 MW of utility power. We own ten of the buildings in which our data center facilities are located. We lease the remaining 14 buildings, which account for approximately 600,000 NRSF, or approximately 36% of our total operating NRSF. These leased buildings accounted for 37% of our total annualized rent as of March 31, 2013. We also currently have 242,000 NRSF under development at two data centers in (Houston and Phoenix), and 820,000 NRSF of additional powered shell space under roof and available for development, and approximately 170 acres of land that are available for future data center facility development. Along with our primary product offering, leasing of colocation space, our customers are increasingly interested in ancillary office and other space. We believe our existing operating portfolio and development pipeline will allow us to meet the evolving needs of our existing customers and continue to attract new customers. The following tables provide an overview of our operating and development properties as of March 31, 2013. 20-------------------------------------------------------------------------------- Table of Contents CyrusOne Inc. Data Center Portfolio As of March 31, 2013 (Unaudited) Operating Net Rentable Square Feet (NRSF)(a) Colocation Powered Shell Available Metropolitan Annualized Space Office & Supporting Percent for Future Development Available Utility Facilities Area Rent(b) (CSF) (c) Other (d) Infrastructure(e) Total(f) Leased(g) (NRSF) (h) Power (MW) (i) South Southwest Fwy (Galleria) Houston $ 41,695,463 63,469 17,385 23,202 104,056 93 % - 15 Westway Park Blvd (Houston West) Houston $ 35,081,808 112,133 12,735 36,567 161,435 92 % 3,000 14 S. State Hwy 121 Business (Lewisville)* Dallas $ 35,068,828 108,687 11,399 59,333 179,419 89 % - 20 Midway** Dallas $ 6,387,262 9,782 - - 9,782 100 % - 1 E. Ben White Blvd (Austin 1)* Austin $ 5,917,525 16,223 21,376 7,516 45,115 94 % - 5 Metropolis Drive (Austin 2)* Austin $ 2,158,715 40,855 4,128 18,563 63,546 9 % - 10 Frankford Road (Carrollton) Dallas $ 1,959,672 47,366 24,330 36,522 108,218 13 % 518,000 20 Westover Hills Blvd (San Antonio) San Antonio $ 1,250,954 35,765 172 25,777 61,714 17 % 35,000 10 North Fwy (Greenspoint)** Houston $ 1,038,086 13,000 1,449 - 14,449 100 % - 1 Marsh Ln.** Dallas $ 1,029,705 2,245 - - 2,245 100 % - 1 Bryan St.** Dallas $ 993,646 3,020 - - 3,020 58 % - 1 South Ellis Street (Phoenix) Arizona $ - 36,222 - 20,916 57,138 0 % 45,000 100 South Total $ 132,581,664 488,767 92,974 228,396 810,137 66 % 601,000 196 Midwest West Seventh Street (7th St.)*** Cincinnati $ 33,218,452 193,003 5,744 158,194 356,941 96 % 71,000 13 Fujitec Drive (Lebanon) Cincinnati $ 20,741,817 60,556 32,484 44,506 137,546 82 % 90,000 12 Industrial Road (Florence)* Cincinnati $ 14,258,855 52,698 46,848 40,374 139,920 94 % - 10 Knightsbridge Drive (Hamilton)* Cincinnati $ 10,552,550 46,565 1,077 35,336 82,978 90 % - 5 Parkway (Mason) Cincinnati $ 5,897,705 34,072 26,458 17,193 77,723 99 % - 3 Springer Street (Lombard)* Chicago $ 2,246,842 13,560 4,115 12,231 29,906 54 % 29,000 3 E. Monroe Street (Monroe St.) South Bend $ 1,494,608 6,350 - 6,478 12,828 70 % 4,000 1 Goldcoast Drive (Goldcoast) Cincinnati $ 1,456,188 2,728 5,280 16,481 24,489 100 % 14,000 1 Crescent Circle (Blackthorn)* South Bend $ 873,259 3,368 - 5,125 8,493 44 % 11,000 1 McAuley Place (Blue Ash)* Cincinnati $ 546,645 6,193 6,950 2,166 15,309 71 % - 1 Midwest Total $ 91,286,921 419,093 128,956 338,084 886,133 90 % 219,000 50 International Kestral Way (London)** London $ 1,606,182 10,000 - - 10,000 39 % - 1 Jurong East (Singapore)** Singapore $ 270,952 3,200 - - 3,200 12 % - 1 International Total $ 1,877,134 13,200 - - 13,200 33 % - 2 Total $ 225,745,719 921,060 221,930 566,480 1,709,470 77 % 820,000 248 * Indicates properties in which we hold a leasehold interest in the building shell and land. All data center infrastructure has been constructed by us and owned by us. ** Indicates properties in which we hold a leasehold interest in the building shell, land, and all data center infrastructure. *** The information provided for the West Seventh Street (7th St.) property includes data for two facilities, one of which we lease and one of which we own. (a) Represents the total square feet of a building under lease or available for lease based on engineers' drawings and estimates but does not include space held for development or space used by CyrusOne. (b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of March 31, 2013, multiplied by 12. For the month of March 2013, customer reimbursements were $20.3 million annualized and consisted of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From April 1, 2011 through March 31, 2013, customer reimbursements under leases with separately metered power constituted between 7.2% and 9.7% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of March 31, 2013 was $236,267,428. Our annualized effective rent was greater than our annualized rent as of March 31, 2013 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (c) CSF represents the NRSF at an operating facility that is currently leased or readily available for lease as colocation space, where customers locate their servers and other IT equipment. (d) Represents the NRSF at an operating facility that is currently leased or readily available for lease as space other than CSF, which is typically office and other space. (e) Represents infrastructure support space, including mechanical, telecommunications and utility rooms, as well as building common areas. (f) Represents the NRSF at an operating facility that is currently leased or readily available for lease. This excludes existing vacant space held for development. (g) Percent leased is determined based on NRSF being billed to customers under signed leases as of March 31, 2013 divided by total NRSF. Leases signed but not commenced as of March 31, 2013 are not included. Supporting infrastructure has been allocated to leased NRSF on a proportionate basis for purposes of this calculation. (h) Represents space that is under roof that could be developed in the future for operating NRSF, rounded to the nearest 1,000. (i) Represents installed power capacity that can be delivered to the facility by the local utility provider. Does not sum to total due to rounding. CyrusOne Inc. NRSF Under Development As of March 31, 2013 (Dollars in millions) (Unaudited) NRSF Under Development(a) Under Development Under Development Costs(b) Metropolitan Colocation Space Supporting Actual to Estimated Costs Facilities Area (CSF) Office & Other Infrastructure Powered Shell(c) Total Date to Completion Total South Ellis Street (Phoenix) Arizona - 36,000 17,000 32,000 85,000 $ 2 $ 11 $ 13 Westway Park Blvd (Houston West) Houston 42,000 - 34,000 81,000 157,000 $ 20 $ 14 $ 34 Total 42,000 36,000 51,000 113,000 242,000 $ 22 $ 25 $ 47 (a) Represents NRSF at a facility for which substantial activities have commenced to prepare the space for its intended use. (b) Represents management's estimate of the total costs required to complete the current NRSF under development. There may be an increase in costs if customers require greater power density. (c) Represents NRSF under construction that, upon completion, will be powered shell available for future development into operating NRSF. 21 -------------------------------------------------------------------------------- Table of Contents Our portfolio is currently leased to approximately 525 companies, many of which are leading global companies. The following table sets forth information regarding the 20 largest customers, including affiliates, in our portfolio based on annualized rent as of March 31, 2013: CyrusOne Inc. Customer Diversification(a) As of March 31, 2013 (Unaudited) Weighted Percentage of Average Portfolio Remaining Number of Annualized Annualized Lease Term in Principal Customer Industry Locations Rent(b) Rent (c) Months (d) 1 Telecommunications (CBI)(e) 7 $ 20,679,452 9.2 % 17.0 2 Energy 4 $ 15,931,172 7.1 % 5.5 3 Research and Consulting Services 3 $ 13,992,897 6.2 % 6.4 4 Energy 2 $ 13,267,978 5.9 % 1.7 5 Information Technology 2 $ 7,071,990 3.1 % 49.0 6 Telecommunication Services 1 $ 6,976,397 3.1 % 51.3 7 Financials 1 $ 6,000,225 2.7 % 86.0 8 Information Technology 1 $ 4,890,027 2.2 % 33.0 9 Telecommunication Services 1 $ 4,864,124 2.2 % 73.0 10 Energy 2 $ 4,731,000 2.1 % 40.0 11 Consumer Staples 1 $ 4,456,646 2.0 % 108.4 12 Information Technology 1 $ 3,877,195 1.7 % 95.0 13 Information Technology 2 $ 3,856,209 1.7 % 94.1 14 Energy 3 $ 3,811,023 1.7 % 2.1 15 Energy 1 $ 3,808,364 1.7 % 16.7 16 Consumer Discretionary 1 $ 3,571,203 1.6 % 38.0 17 Energy 1 $ 3,406,090 1.5 % 27.0 18 Consumer Discretionary 1 $ 3,233,553 1.4 % 8.8 19 Energy 1 $ 3,018,000 1.3 % 6.0 20 Energy 1 $ 2,997,060 1.3 % 10.6 $ 134,440,605 59.7 % 30.3 (a) Includes affiliates. (b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of March 31, 2013, multiplied by 12. For the month of March 2013, customer reimbursements were $20.3 million annualized and consisted of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From April 1, 2011 through March 31, 2013, customer reimbursements under leases with separately metered power constituted between 7.2% and 9.7% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of March 31, 2013 was $236,267,428. Our annualized effective rent was greater than our annualized rent as of March 31, 2013 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (c) Represents the customer's total annualized rent divided by the total annualized rent in the portfolio as of March 31, 2013, which was approximately $225.7 million. (d) Weighted average based on customer's percentage of total annualized rent expiring and is as of March 31, 2013, assuming that customers exercise no renewal options and exercise all early termination rights that require payment of less than 50% of the remaining rents. Early termination rights that require payment of 50% or more of the remaining lease payments are not assumed to be exercised because such payments approximate the profitability margin of leasing that space to the customer, such that we do not consider early termination to be economically detrimental to us. (e) Includes information for both Cincinnati Bell Technology Solutions (CBTS) and Cincinnati Bell Telephone and two customers that have contracts with CBTS. We expect the contracts for these two customers to be assigned to us, but the consents for such assignments have not yet been obtained. Excluding these customers, Cincinnati Bell Inc. and subsidiaries represented 2.8% of our annualized rent as of March 31, 2013. 22 -------------------------------------------------------------------------------- Table of Contents Lease Distribution The following table sets forth information relating to the distribution of customer leases in the properties in our portfolio, based on NRSF under lease as of March 31, 2013: CyrusOne Inc. Lease Distribution As of March 31, 2013 (Unaudited) Percentage of Number of Percentage of Total Leased Portfolio Annualized Percentage of NRSF Under Lease(a) Customers(b) All Customers NRSF(c) Leased NRSF Rent(d) Annualized Rent 0-999 426 81 % 73,725 6 % $ 32,585,466 14 % 1000-2499 36 7 % 58,561 4 % $ 16,074,720 7 % 2500-4999 22 4 % 77,798 6 % $ 18,458,313 8 % 5000-9999 15 3 % 115,356 9 % $ 31,023,494 14 % 10000+ 28 5 % 988,799 75 % $ 127,603,726 57 % Total 527 100 % 1,314,239 100 % $ 225,745,719 100 % (a) Represents all leases in our portfolio, including colocation, office and other leases. (b) Represents the number of customers in our portfolio utilizing data center, office and other space. (c) Represents the total square feet at a facility under lease and that has commenced billing, excluding space held for development or space used by CyrusOne. A customer's leased NRSF is estimated based on such customer's direct CSF or office and light-industrial space plus management's estimate of infrastructure support space, including mechanical, telecommunications and utility rooms, as well as building common areas. (d) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of March 31, 2013, multiplied by 12. For the month of March 2013, customer reimbursements were $20.3 million annualized and consisted of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From April 1, 2011 through March 31, 2013, customer reimbursements under leases with separately metered power constituted between 7.2% and 9.7% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of March 31, 2013 was $236,267,428. Our annualized effective rent was greater than our annualized rent as of March 31, 2013 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. 23 -------------------------------------------------------------------------------- Table of Contents The following table sets forth a summary schedule of the customer lease expirations for leases in place as of March 31, 2013 plus available space, for each of the 10 full calendar years and the partial year beginning April 1, 2013, at the properties in our portfolio. Customers whose leases have been auto-renewed prior to March 31, 2013 are shown in the calendar year in which their current auto-renewed term expires. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and exercise all early termination rights that require payment of less than 50% of the remaining rents. Early termination rights that require payment of 50% or more of the remaining lease payments are not assumed to be exercised because such payments approximate the profitability margin of leasing that space to the customer, such that we do not consider early termination to be economically detrimental to us. CyrusOne Inc. Lease Expirations As of March 31, 2013 (Unaudited) Number of Percentage of Leases Total Operating Percentage of Annualized Percentage of Annualized Rent Annualized Rent Year(a) Expiring (b) NRSF Expiring Total NRSF Rent(c) Annualized Rent at Expiration (d) at Expiration Available 395,231 23 % Month-to-Month 250 47,843 3 % $ 10,377,892 5 % $ 10,377,892 4 % Remainder of 2013 543 373,942 22 % $ 84,564,960 37 % $ 84,642,160 35 % 2014 382 115,888 7 % $ 29,516,754 13 % $ 29,516,754 12 % 2015 468 217,206 13 % $ 35,587,026 16 % $ 40,471,445 17 % 2016 85 22,622 1 % $ 11,477,208 5 % $ 12,378,553 5 % 2017 79 202,939 12 % $ 24,434,472 11 % $ 25,054,384 11 % 2018 26 36,552 2 % $ 6,929,433 3 % $ 7,097,493 3 % 2019 2 94,401 5 % $ 4,864,124 2 % $ 4,864,124 2 % 2020 3 81,997 5 % $ 6,000,225 3 % $ 6,000,225 3 % 2021 2 28,697 1 % $ 3,877,195 2 % $ 6,013,195 3 % 2022 6 46,163 3 % $ 5,412,101 2 % $ 9,859,682 4 % 2023 - Thereafter 6 45,989 3 % $ 2,704,329 1 % $ 3,197,534 1 % Total 1,852 1,709,470 100 % $ 225,745,719 100 % $ 239,473,441 100 % (a) Leases that were auto-renewed prior to March 31, 2013 are shown in the calendar year in which their current auto-renewed term expires. Unless otherwise stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and exercise all early termination rights that require payment of less than 50% of the remaining rents. Early termination rights that require payment of 50% or more of the remaining lease payments are not assumed to be exercised because such payments approximate the profitability margin of leasing that space to the customer, such that we do not consider early termination to be economically detrimental to us. (b) Number of leases represents each agreement with a customer. A lease agreement could include multiple spaces and a customer could have multiple leases. (c) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of March 31, 2013, multiplied by 12. For the month of March 2013, customer reimbursements were $20.3 million annualized and consisted of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From April 1, 2011 through March 31, 2013, customer reimbursements under leases with separately metered power constituted between 7.2% and 9.7% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of March 31, 2013 was $236,267,428. Our annualized effective rent was greater than our annualized rent as of March 31, 2013 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (d) Represents the final monthly contractual rent under existing customer leases that had commenced as of March 31, 2013, multiplied by 12. 24 -------------------------------------------------------------------------------- Table of Contents Results of Operations Three Months Ended March 31, 2013 Compared to Three Months Ended March 31, 2012 Successor Predecessor Predecessor January 24, 2013 to January 1, 2013 to Three Months Ended (dollars in millions) March 31, 2013 January 23, 2013 March 31, 2012 Revenue $ 45.0 $ 15.1 $ 52.1 Costs and expenses: Property operating expenses 15.3 4.8 17.3 Sales and marketing 2.1 0.7 1.8 General and administrative 5.4 1.5 4.5 Transaction-related compensation - 20.0 - Depreciation and amortization 16.4 5.3 16.4 Transaction costs - 0.1 - Management fees charged by CBI - - 0.7 Loss on sale of receivables to CBF - - 1.2 Total costs and expenses 39.2 32.4 41.9 Operating income 5.8 (17.3 ) 10.2 Interest expense 8.4 2.5 10.3 Loss before income taxes (2.6 ) (19.8 ) (0.1 ) Income tax expense 0.2 0.4 0.6 Net loss $ (2.8 ) $ (20.2 ) $ (0.7 ) Noncontrolling interest in net loss (1.9 ) - - Net loss attributed to common stockholders $ (0.9 ) $ - $ - Operating margin 12.9 % (114.6 )% 19.6 % Capital expenditures *: Acquisitions of real estate 18.2 - 23.4 Development of real estate 26.5 7.6 27.9 Recurring real estate 0.2 0.1 0.3 All other non-real estate - - 1.2 Total $ 44.9 $ 7.7 $ 52.8 Metrics information: Colocation square feet* 921,000 921,000 809,000 Utilization rate* 81 % 81 % 85 % Loss per share - basic $ (0.05 ) - - Loss per share - diluted $ (0.05 ) - - Dividend declared per share $ 0.16 - - * See "Key Operating Metrics" for a definition of capital expenditures, CSF and utilization rate. 25 -------------------------------------------------------------------------------- Table of Contents Revenue Revenue for the three months ended March 31, 2013 was $60.1 million, an increase of $8.0 million, or 15%, compared to $52.1 million for the corresponding quarter in 2012. This increase is primarily due to the change in customers and contractual monthly recurring revenue which increased to $18.8 million from $16.3 million or 17% for the three months ended March 31, 2013 compared to the three months ended March 31, 2012. Monthly recurring revenue growth comes from leasing incremental space, power and related colocation services to both new and existing customers. As of March 31, 2013, we had 119 of the Fortune 1000 customers or private or foreign enterprises of equivalent size. Our capacity at March 31, 2013, was approximately 921,000 CSF which is an increase of 14% from March 31, 2012. The utilization rate of our data center facilities was 81%, for the three months ended March 31, 2013, compared to 85% at March 31, 2012. Recurring rent churn was 0.4% for the first quarter of 2013, or 1.6% annualized, compared to 0.5% for the first quarter of 2012 and 4.6% annual recurring rent churn for the full year 2012. There are a number of leases subject to expire within the next 12-months, however we expect a significant number to renew. Costs and Expenses Property operating expenses-Property operating expense for the three months ended March 31, 2013 was $20.1 million, an increase of $2.8 million, or 16%, compared to $17.3 million for the corresponding quarter in 2012. The increase in property operating expenses increased primarily due to the increase in data center space over the past year. Since March of 2012, we have commissioned three additional data center facilities adding over 112,000 CSF. As a result our electricity and payroll related costs increased $2.3 million compared to the three months ended March 31, 2012. In addition, rent expense increased by approximately $0.2 million compared to the three months ended March 31, 2012. Sales and marketing expenses-Sales and marketing expenses for the three months ended March 31, 2013 were $2.8 million, an increase of $1.0 million, or 56%, compared to $1.8 million for the corresponding quarter in 2012. Compensation to sales and marketing personnel and other support costs increased by approximately $1.0 million in 2013 compared to 2012, resulting from the increase in our staff, and higher advertising costs to promote data center facilities in new markets. General and administrative expenses-General and administrative expenses for the three months ended March 31, 2013 were $6.9 million, an increase of $2.4 million, compared to the same period in 2012. Payroll, employee benefits, contract services, legal and consulting costs increased as we made investments to support public company functions and invest in future growth over 2012 and the first quarter of 2013. Transaction-related compensation- We recorded compensation expense of $20.0 million for the three months ended March 31, 2013 related to CBI's long-term incentive plan. There were no such costs incurred in other periods and such costs represent one-time compensation charges allocated to us by CBI in the period ended January 23, 2013. On April 8, 2013, CBI reimbursed the Company for $19.6 million of these costs. Depreciation and amortization expense-Depreciation and amortization expense for the three months ended March 31, 2013 were $21.7 million an increase of $5.3 million, or 32%, compared to $16.4 million for the corresponding quarter in 2012 driven by new assets placed in service since March 2012. Transaction costs-Transaction costs for the three months ended March 31, 2013 were $0.1 million, incurred as costs associated with the IPO. Management fees charged by CBI-Management fees for the three months ended March 31, 2012 were $0.7 million. These fees were allocated for services provided by CBI, including executive management, legal, treasury, human resources, accounting, tax, internal audit and IT services. Effective November 20, 2012, the management fee charged by CBI was terminated and replaced with a transition services agreement. There was no such related cost for the three months ended March 31, 2013. Loss on sale of receivables to CBF-Loss on sale of receivables for the three months ended March 31, 2012 was $1.2 million. Prior to October 1, 2012, substantially all of our receivables were sold to CBF at a discount of 2.5% from their face value. Effective October 1, 2012, we terminated our participation in this program hence there were no losses in 2013. Operating Income Loss Operating loss for the three months ended March 31, 2013 was $11.5 million, compared to operating income of $10.2 million for the corresponding quarter in 2012. Operating income decreased as a result of the transaction-related compensation charge of $20.0 million from CBI, higher property operating expenses as a result of our expanded data center operations and investment in corporate functions to support our growth, partially offset by revenue growth of $8.0 million. 26 -------------------------------------------------------------------------------- Table of Contents Nonoperating Expenses Interest expense-Interest expense for the three months ended March 31, 2013 was $10.9 million, an increase of $0.6 million compared to $10.3 million for the corresponding quarter in 2012. The increase in interest expense in 2013 was primarily related to our Senior Notes which bear interest at 6.375% and mature in 2022. Income tax expense-Income tax expense was $0.6 million for the three months ended March 31, 2013, which was comparable to the same corresponding quarter in 2012. Capital Expenditures Capital expenditures for the three months ended March 31, 2013 were $52.6 million, as compared to $52.8 million for the three months ended March 31, 2012. Our capital expenditures for 2013 includes our purchase of a 33 acre parcel of land in the Houston West metro area for $18.2 million. This land will be developed further into data center space. In addition, we incurred capital expenditures related to development of real estate of $34.1 million for the three months ended March 31, 2013. Financial Condition, Liquidity and Capital Resources Liquidity and Capital Resources We will be required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction and excluding any net capital gains, to our stockholders on an annual basis in order to qualify as a REIT for federal income tax purposes. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly distributions to common stockholders and operating partnership unit holders from cash flow from operating activities. All such distributions are at the discretion of our board of directors. On November 20, 2012, CyrusOne LP issued $525 million of Senior Notes and entered into a $225 million revolving credit facility. The Senior Notes are scheduled to mature in 2022 and bear interest at a rate of 6.375% per annum. Borrowings under the revolving credit facility bear interest at a variable rate based on, at CyrusOne LP's option, a rate equal to an applicable margin over either a base rate or a LIBOR rate. The revolving credit facility is scheduled to mature in 2017. We utilized approximately $480 million of net proceeds from our Senior Notes issuance to partially repay our notes due to related parties, which totaled $662.7 million at November 20, 2012. The notes payable remaining after such repayment were not contributed to the operating partnership. In connection with our initial public offering, we sold approximately 19.0 million shares of CyrusOne Inc., the net proceeds of $337.1 million were used to purchase a 33.9% ownership of CyrusOne LP. The net proceeds of approximately $337 million will be used by CyrusOne LP to fund future growth and general corporate costs. As of March 31, 2013 and December 31, 2012, we had $328.6 million and $16.5 million, respectively, of cash and cash equivalents. Prior to the closing of the formation transactions on November 20, 2012, we participated in CBI's centralized cash management program. Prior to such date, all excess cash was transferred to CBI's corporate cash accounts on a periodic basis. Likewise, substantially all funds to finance our operations, including acquisitions and development costs, were funded by CBI. Short-term Liquidity Our short-term liquidity requirements primarily consist of operating expenses and capital expenditures composed primarily of acquisition costs for the development of data center properties. For the first quarter of 2013, our capital expenditures were $52.6 million. We expect to fund future capital expenditures from the cash available on our balance sheet and availability under the revolving credit facility. Our capital expenditures are largely discretionary and will be applied to expand our existing data center properties, acquire or construct new facilities, or both. We intend to continue to pursue additional growth opportunities and are prepared to commit additional resources to support this growth. Long-term Liquidity Our long-term liquidity requirements primarily consist of distributions to stockholders and the development of additional data center properties. We expect to meet our long-term liquidity requirements from the cash available on our balance sheet cash flows from our operations, issuances of debt and equity securities, secured borrowings and borrowings under our revolving credit facility. As of March 31, 2013, our debt and other financing arrangements were $618.9 million, consisting of $525 million of Senior Notes due 2022, capital lease obligations of $31.0 million and other financing arrangements of $62.9 million. We have a revolving credit agreement of $225.0 million. As of March 31, 2013, we did not have any borrowings outstanding on this facility, leaving available borrowing capacity of $225.0 million. 27-------------------------------------------------------------------------------- Table of Contents Cash Flows Comparison of Three Months Ended March 31, 2013 As of March 31, 2013, cash and cash equivalents were $328.6 million, up from $16.5 million as of December 31, 2012, an increase of $312.1 million, as a result of raising capital from the initial public offering. Net cash generated from operations was $24.9 million in the first three months of 2013, an increase of $12.4 million compared to the corresponding period in 2012. The increase in net cash generated from operations was directly related to the changes in our operating assets and liabilities compared to the same period 2012. Cash used in investing activities was $48.9 million for three months of 2013, a decrease of $3.9 million compared to the corresponding period in 2012. Capital expenditures were $52.6 million for the three months ended March 31, 2013 as compared to $52.8 million for the three months ended March 31, 2012. Cash provided by financing activities was $336.1 million for three months of 2013, up $294.5 million compared to the corresponding period in 2012. The increase was directly related to the issuance of common stock as a result of the initial public offering ("IPO") offset by IPO related cost were $23.4 million for the three months ended March 31, 2013. Distribution Policy CyrusOne Inc. is required to distribute 90% of its taxable income (excluding capital gains) on an annual basis in order for it to continue to qualify as a REIT for federal income tax purposes. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly distributions to our common shareholders from cash flow from our operating partnership's operating activities. In addition, the Operating Partnership Agreement requires ratable distributions to partners, and therefore, similar distributions will be made to all holders of operating partnership units. All such distributions are at the discretion of our parent company's board of directors. We consider market factors and our operating partnership's performance in addition to REIT requirements in determining distribution levels. While we plan to continue to make quarterly distributions, no assurances can be made as to the frequency or amounts of any future distributions. The payment of common share distributions is dependent upon our financial condition, operating results and REIT distribution requirements and may be adjusted at the discretion of the Board of Directors during the year. |