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CYRUSONE LP - 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," "approximately," "intends," "plans" "estimates," or "anticipates" or the negative of these words and phrases or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions. Such statements are subject to risks, uncertainties and assumptions and are not guarantees of future performance, which may be affected by known and unknown risks, trends, uncertainties and factors that are beyond our control. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove incorrect, actual results may vary materially from those anticipated, estimated or projected. The following factors, among others, could cause actual results and future events to differ materially from those set forth or contemplated in the forward-looking statements: (i) the geographic concentration of our data centers in certain markets and any adverse developments in local economic conditions or the demand for data center space in these markets; (ii) increased operating costs; (iii) difficulties in identifying properties to acquire and completing acquisitions; (iv) the significant competition in our industry and an inability to lease vacant space, renew existing leases or release space as leases expire; (v) lack of sufficient customer demand to realize expected returns on our investments to expand our property portfolio; (vi) decreased revenue from costs and disruptions associated with any failure of our physical infrastructure or services; (vii) our ability to lease available space to existing or new customers; (viii) our failure to obtain necessary outside financing; (ix) our failure to qualify as a REIT; (x) financial market fluctuations; (xi) changes in real estate and zoning laws and increases in real property tax rates; (xii) delays or disruptions in third-party network connectivity; (xiii) service failures or price increases by third party power suppliers; (xiv) inability to renew net leases on the data center properties we lease; and (xv) other factors affecting the real estate industry generally. While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. We disclaim any obligation to publicly update or revise any forward-looking statement to reflect changes in underlying assumptions or factors, of new information, data or methods, future events or other changes. The risks included here are not exhaustive, and additional factors could adversely affect our business and financial performance, including factors and risks included in other sections of this Quarterly Report. Additional information concerning these and other risks and uncertainties is contained in our other periodic filings with the United States Securities and Exchange Commission, or SEC, pursuant to the Exchange Act. We discussed a number of material risks in Item 1A. "Risk Factors" of our Annual Report on Form 10-K for the year ended December 31, 2013. Those risks continue to be relevant to our performance and financial condition. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as a prediction of actual results. Presentation References in this Quarterly Report to "Successor" refers to the Company on or after January 24, 2013 and "Predecessor" are the results prior to January 24, 2013. The Predecessor results have been prepared on a "carve-out" basis from CBI's consolidated financial statements using the historical results of operations, cash flows, assets and liabilities attributable to the data center business. These allocations reflect significant assumptions, and the combined financial statements do not fully reflect what the financial position, results of operations and cash flows would have been had CyrusOne been a stand-alone company during the periods presented. As a result, historical financial information is not necessarily indicative of CyrusOne's future results of operations, financial position and cash flows. The related financial statement tables will be presented showing the statements that relate to the Predecessor as well as the Successor. The results of both the Predecessor and Successor are presented separately but will be discussed on a combined basis for comparability purposes. 52-------------------------------------------------------------------------------- Table of Contents Overview Our Company. We are an owner, operator and developer of enterprise-class, carrier-neutral data center properties. Enterprise-class, carrier-neutral data centers are purpose-built facilities with redundant power, cooling and access to a range of telecommunications carriers. We provide mission-critical data center facilities that protect and ensure the continued operation of information technology ("IT") infrastructure for 656 customers in 25 operating data centers in ten distinct markets (eight cities in the U.S., London and Singapore). We provide mission-critical data center facilities that protect and ensure the continued operation of IT infrastructure for our customers. Our goal is to be the preferred global data center provider to the Fortune 1000. As of September 30, 2014, our customers included nine of the Fortune 20 and 141 of the Fortune 1000 or private or foreign enterprises of equivalent size. These 141 Fortune 1000 customers provided 74% of our annualized rent as of September 30, 2014. Additionally, as of September 30, 2014, our top 10 customers represented 42% of our annualized rent. We cultivate long-term strategic relationships with our customers and provide them with solutions for their data center facilities and IT infrastructure challenges. Our offerings provide flexibility, reliability and security delivered through a tailored, customer service focused platform that is designed to foster long-term relationships. We focus on attracting customers that have not historically outsourced their data center needs and providing them with solutions that address their current and future needs. Our facilities and construction design allow us to offer flexibility in density, power resiliency and the opportunity for expansion as our customers' needs grow. The National IX Platform delivers interconnection across states and between metro-enabled sites within the CyrusOne footprint and beyond. The platform enables high-performance, low-cost data transfer and accessibility for customers by uniting all of our data centers. Our Portfolio. As of September 30, 2014, our property portfolio included 25 operating data centers in ten distinct markets collectively providing approximately 2,178,000 net rentable square feet ("NRSF"), of which 84% was leased, and powered by approximately 194 MW of available UPS capacity. We own fourteen of the buildings in which our data center facilities are located. We lease the remaining eleven buildings, which account for approximately 375,000 NRSF, or approximately 17% of our total operating NRSF. These leased buildings accounted for 21% of our total annualized rent as of September 30, 2014. We also currently have 712,000 NRSF under development, as well as 551,000 NRSF of additional powered shell space under roof available for development. In addition, we have approximately 200 acres of land that are available for future data center shell development. Along with our primary product offering, leasing of colocation space, our customers are increasingly interested in ancillary office and other space. We believe our existing operating portfolio and development pipeline will allow us to meet the evolving needs of our existing customers and continue to attract new customers. The following tables provide an overview of our operating and development properties as of September 30, 2014. 53-------------------------------------------------------------------------------- Table of Contents CyrusOne Inc. Data Center Portfolio As of September 30, 2014 (Unaudited) Operating Net Rentable Square Feet (NRSF)(a) Powered Shell Office Available Colocation & Other Supporting for Future Metro Annualized Space CSF Office & Leased Infrastructure Development Available UPS Facilities Area Rent(b) (CSF)(c) CSF Leased(d) Utilized(e) Other(f) (g) (h) Total(i) (NRSF)(j) Capacity (MW)(k) Westway Park Blvd., Houston, TX (Houston West 1) Houston $ 52,937,485 112,133 97 % 97 % 10,563 98 % 37,063 159,759 3,000 28 S. State Highway 121 Business Lewisville, TX (Lewisville)* Dallas 38,681,596 108,687 97 % 97 % 11,279 96 % 59,345 179,311 - 18 West Seventh St., Cincinnati, OH (7th Street)*** Cincinnati 34,904,962 211,742 91 % 91 % 5,744 100 % 171,561 389,047 37,000 13 Southwest Fwy., Houston, TX (Galleria) Houston 31,849,249 63,469 93 % 93 % 17,259 69 % 23,203 103,931 - 14 W. Frankford, Carrollton, TX (Frankford) Dallas 21,014,226 170,531 63 % 77 % 13,745 70 % 66,061 250,337 334,000 18 South Ellis Street Chandler, AZ (Phoenix 1) Phoenix 20,981,256 77,528 99 % 99 % 34,471 10 % 38,441 150,440 31,000 27 Kingsview Dr., Lebanon, OH (Lebanon) Cincinnati 20,445,053 65,303 81 % 83 % 44,886 72 % 52,950 163,139 65,000 14 Westover Hills Blvd, San Antonio, TX (San Antonio 1) San Antonio 18,964,617 43,843 100 % 100 % 5,633 85 % 45,939 95,415 11,000 12 Industrial Rd., Florence, KY (Florence) Cincinnati 14,911,594 52,698 100 % 100 % 46,848 87 % 40,374 139,920 - 9 Westway Park Blvd., Houston, TX (Houston West 2) Houston 14,091,664 79,492 72 % 72 % 3,112 - % 55,642 138,246 12,000 12 Knightsbridge Dr., Hamilton, OH (Hamilton)* Cincinnati 9,454,719 46,565 75 % 75 % 1,077 100 % 35,336 82,978 - 10 Metropolis Dr., Austin, TX (Austin 2) Austin 9,133,505 43,772 72 % 72 % 1,357 67 % 22,892 68,021 - 5 Parkway Dr., Mason, OH (Mason) Cincinnati 5,870,151 34,072 100 % 100 % 26,458 98 % 17,193 77,723 - 4 E. Ben White Blvd., Austin, TX (Austin 1)* Austin 5,573,555 16,223 87 % 87 % 21,376 100 % 7,516 45,115 - 2 Midway Rd., Carrollton, TX (Midway)** Dallas 5,408,662 8,390 100 % 100 % - - % - 8,390 - 1 Kestral Way (London)** London 3,591,360 10,000 99 % 99 % - - % - 10,000 - 1 Springer St., Lombard, IL (Lombard) Chicago 2,363,030 13,516 70 % 70 % 4,115 100 % 12,230 29,861 29,000 3 Marsh Lane, Carrollton, TX (Marsh Ln)** Dallas 2,238,345 4,245 100 % 100 % - - % - 4,245 - 1 Goldcoast Dr., Cincinnati, OH (Goldcoast) Cincinnati 1,471,243 2,728 100 % 100 % 5,280 100 % 16,481 24,489 14,000 1 Bryan St., Dallas, TX (Bryan St)** Dallas 983,133 3,020 51 % 51 % - - % - 3,020 - 1 E. Monroe St., South Bend, IN (Monroe St.) South Bend 922,565 6,350 37 % 37 % - - % 6,478 12,828 4,000 1 North Freeway, Houston, TX (Greenspoint)** Houston 744,287 13,000 100 % 100 % 1,449 100 % - 14,449 - 1 McAuley Place, Blue Ash, OH (Blue Ash)* Cincinnati 532,002 6,193 39 % 39 % 6,950 100 % 2,166 15,309 - 1 Jurong East (Singapore)** Singapore 334,213 3,200 19 % 19 % - - % - 3,200 - 1 Crescent Circle, South Bend, IN (Blackthorn)* South Bend 319,790 3,432 38 % 38 % - - % 5,125 8,557 11,000 1 Total $ 317,722,262 1,200,132 86 % 88 % 261,602 75 % 715,996 2,177,730 551,000 194 * 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. 54-------------------------------------------------------------------------------- Table of Contents (a) Represents the total square feet of a building under lease or available for lease based on engineers' drawings and estimates but does not include space held for development or space used by CyrusOne. (b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of September 30, 2014, multiplied by 12. For the month of September 2014, our total annualized rent was $317.7 million, customer reimbursements were $42.9 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 October 1, 2012 through September 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of September 30, 2014 was $326,011,822. Our annualized effective rent was greater than our annualized rent as of September 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (c) CSF represents the NRSF at an operating facility that is currently leased or readily available for lease as colocation space, where customers locate their servers and other IT equipment. (d) Percent leased is determined based on CSF being billed to customers under signed leases as of September 30, 2014 divided by total CSF. Leases signed but not commenced as of September 2014 are not included. (e) Utilization is calculated by dividing CSF under signed leases for colocation space (whether or not the customer has occupied the space) by total CSF. (f) Represents the NRSF at an operating facility that is currently leased or readily available for lease as space other than CSF, which is typically office and other space. (g) Percent leased is determined based on Office & Other space being billed to customers under signed leases as of September 30, 2014 divided by total Office & Other space. Leases signed but not commenced as of September 2014 are not included. (h) Represents infrastructure support space, including mechanical, telecommunications and utility rooms, as well as building common areas. (i) Represents the NRSF at an operating facility that is currently leased or readily available for lease. This excludes existing vacant space held for development. (j) Represents space that is under roof that could be developed in the future for operating NRSF, rounded to the nearest 1,000. (k) UPS capacity (also referred to as critical load) represents the aggregate power available for lease and exclusive use by customers from the facility's installed universal power supplies (UPS) expressed in terms of megawatts. The capacity reported is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels. Does not sum to total due to rounding. CyrusOne Inc. NRSF Under Development As of September 30, 2014 (Dollars in millions) (Unaudited) NRSF Under Development(a) Under Development Costs(b) UPS MW Estimated Metropolitan Colocation Space Supporting Capacity Actual to Costs to Facilities Area (CSF) Office & Other Infrastructure Powered Shell(c) Total (d) Date(e) Completion Total W. Frankford Road (Carrollton) Dallas - 21,000 2,000 - 23,000 - $ 2 $3-4 $5-6 Westover Hills Blvd. (San Antonio 2) San Antonio 30,000 20,000 25,000 49,000 124,000 3.0 21 19-23 40-44 Westway Park Blvd. (Houston West 3) Houston - - - 329,000 329,000 - 15 17-21 32-35 South Ellis Street, Chandler, AZ (Phoenix 2) Phoenix 30,000 8,000 18,000 51,000 107,000 6.0 15 28-35 44-50 Ridgetop Circle, Sterling, VA (Northern VA) Loudon County 30,000 16,000 35,000 48,000 129,000 6.0 18 24-29 42-47 Total 90,000 65,000 80,000 477,000 712,000 15.0 $ 71 $91-112 $163-182 (a) Represents NRSF at a facility for which activities have commenced or are expected to commence in the next 2 quarters to prepare the space for its intended use. Estimates and timing are subject to change. (b) Represents management's estimate of the total costs required to complete the current NRSF under development. There may be an increase in costs if customers require greater power density. (c) Represents NRSF under construction that, upon completion, will be powered shell available for future development into operating NRSF. (d) UPS Capacity (also referred to as critical load) represents the aggregate power available for lease to and exclusive use by customers from the facility's installed universal power supplies (UPS) expressed in terms of megawatts. The capacity presented is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels. (e) Capex-to-date is the cash investment as of September 30, 2014. There may be accruals above this amount for work completed, for which cash has not yet been paid. 55-------------------------------------------------------------------------------- Table of Contents Our portfolio is currently leased to 656 companies, many of which are leading global companies. The following table sets forth information regarding the 20 largest customers, including their affiliates, in our portfolio based on annualized rent as of September 30, 2014: CyrusOne Inc. Customer Diversification(a) As of September 30, 2014 (Unaudited) Weighted Percentage of Average Portfolio Remaining Number of Annualized Annualized Lease Term in Principal Customer Industry Locations Rent(b) Rent(c) Months(d) 1 Energy 2 $ 22,102,774 7.0 % 29.3 2 Telecommunications (CBI) (e) 8 19,676,079 6.2 % 21.3 3 Information Technology 3 15,793,623 5.0 % 45.2 4 Information Technology 1 15,694,569 4.9 % 54.0 5 Telecommunication Services 2 14,449,470 4.5 % 40.6 6 Research and Consulting Services 3 14,082,587 4.4 % 20.0 7 Energy 5 13,575,586 4.3 % 5.8 8 Information Technology 2 8,308,753 2.6 % 33.1 9 Financials 1 6,000,225 1.9 % 68.0 10 Telecommunication Services 4 5,239,512 1.6 % 55.0 11 Consumer Staples 1 4,971,185 1.6 % 91.3 12 Energy 2 4,944,360 1.6 % 22.0 13 Energy 1 4,871,707 1.5 % 12.1 14 Information Technology 1 4,795,209 1.5 % 14.1 15 Information Technology 1 4,627,418 1.5 % 77.0 16 Information Technology 2 4,040,559 1.3 % 62.1 17 Energy 3 3,881,430 1.2 % 6.5 18 Energy 1 3,637,740 1.1 % 20.3 19 Energy 2 3,475,880 1.1 % 26.3 20 Consumer Discretionary 1 3,418,965 1.1 % 2.1 $ 177,587,631 55.9 % 34.0 (a) Includes affiliates. (b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of September 30, 2014, multiplied by 12. For the month of September 2014, our total annualized rent was $317.7 million, and customer reimbursements were $42.9 million annualized, consisting of reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From October 1, 2012 through September 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of September 30, 2014 was $326,011,822. Our annualized effective rent was greater than our annualized rent as of September 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (c) Represents the customer's total annualized rent divided by the total annualized rent in the portfolio as of September 30, 2014, which was approximately $317.7 million. (d) Weighted average based on customer's percentage of total annualized rent expiring and is as of September 30, 2014, 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 2.3% of our annualized rent as of September 30, 2014. 56-------------------------------------------------------------------------------- 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 September 30, 2014: CyrusOne Inc. Lease Distribution As of September 30, 2014 (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 0-999 488 75 % 99,342 5 % $ 36,485,445 12 % 1000-2499 58 9 % 93,913 5 % 20,331,043 6 % 2500-4999 32 5 % 119,610 7 % 22,962,467 7 % 5000-9999 32 5 % 229,970 13 % 57,640,214 18 % 10000+ 38 6 % 1,281,708 70 % 180,303,093 57 % Total 648 100 % 1,824,543 100 % $ 317,722,262 100 % (a) Represents all leases in our portfolio, including colocation, office and other leases. (b) Represents the number of customers occupying data center, office and other space as of September 30, 2014. This may vary from total customer count as some customers may be under contract, but have yet to occupy 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 September 30, 2014, multiplied by 12. For the month of September 2014, our total annualized rent was $317.7 million, customer reimbursements were $42.9 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 October 1, 2012 through September 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of September 30, 2014 was $326,011,822. Our annualized effective rent was greater than our annualized rent as of September 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. 57-------------------------------------------------------------------------------- Table of Contents Lease Expiration The following table sets forth a summary schedule of the customer lease expirations for leases in place as of September 30, 2014 plus available space, for the properties in our portfolio. Customers whose leases have been auto-renewed prior to September 30, 2014 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 September 30, 2014 (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 353,188 Month-to-Month 222 24,300 1 % $ 7,733,080 2 % $ 7,733,080 2 % Remainder of 2014 356 138,458 8 % 40,118,406 13 % 40,205,393 12 % 2015 656 338,573 19 % 55,850,353 18 % 56,440,194 17 % 2016 521 244,794 13 % 57,565,257 18 % 57,728,673 17 % 2017 576 300,419 16 % 40,757,474 13 % 42,088,217 12 % 2018 202 210,354 12 % 45,749,213 14 % 50,800,499 15 % 2019 136 241,489 13 % 31,258,728 10 % 36,149,302 11 % 2020 66 159,638 9 % 15,607,294 5 % 19,401,405 6 % 2021 62 71,054 4 % 13,892,146 4 % 16,259,402 5 % 2022 3 30,921 2 % 3,493,758 1 % 3,804,610 1 % 2023 - Thereafter 36 64,542 3 % 5,696,553 2 % 8,381,426 2 % Total 2,836 2,177,730 100 % $ 317,722,262 100 % $ 338,992,201 100 % (a) Leases that were auto-renewed prior to September 30, 2014 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. (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 September 30, 2014, multiplied by 12. For the month of September 2014, our total annualized rent was $317.7 million, customer reimbursements were $42.9 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 October 1, 2012 through September 30, 2014, customer reimbursements under leases with separately metered power constituted between 8.9% and 14.2% of annualized rent. After giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of September 30, 2014 was $326,011,822. Our annualized effective rent was greater than our annualized rent as of September 30, 2014 because our positive straight-line and other adjustments and amortization of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments for services. (d) Represents the final monthly contractual rent under existing customer leases that had commenced as of September 30, 2014, multiplied by 12. 58-------------------------------------------------------------------------------- Table of Contents Results of Operations Three and Nine Months Ended September 30, 2014, Compared to Three Months Ended September 30, 2013 and Periods Ended September 30, 2013 and January 23, 2013: Successor Three Months Ended September 30, Successor Successor Predecessor Nine Months Ended January 24, 2013 September 30, to September 30, January 1, 2013 to (dollars in millions) 2014 2013 $ Change % Change 2014 2013 January 23, 2013 Revenue $ 84.8 $ 67.5 $ 17.3 26 % $ 244.0 $ 176.1 $ 15.1 Costs and expenses: Property operating expenses 33.0 24.2 8.8 36 % 92.5 64.1 4.8 Sales and marketing 3.2 2.3 0.9 39 % 9.7 7.3 0.7 General and administrative 9.0 7.2 1.8 25 % 24.7 19.7 1.5 Transaction-related compensation - - - n/m - - 20.0 Depreciation and amortization 30.0 23.9 6.1 26 % 87.4 63.3 5.3 Restructuring charges - 0.7 (0.7 ) (100 )% - 0.7 - Transaction costs - 0.7 (0.7 ) (100 )% 0.9 1.1 0.1 Total costs and expenses 75.2 59.0 16.2 27 % 215.2 156.2 32.4 Operating income (loss) 9.6 8.5 1.1 13 % 28.8 19.9 (17.3 ) Interest expense 9.0 10.5 (1.5 ) (14 )% 30.4 29.7 2.5 Other income - (0.1 ) 0.1 (100 )% - (0.1 ) - Loss on extinguishment of debt - - - n/m - 1.3 - Net income (loss) before income taxes 0.6 (1.9 ) 2.5 (132 )% (1.6 ) (11.0 ) (19.8 ) Income tax expense (0.4 ) (0.3 ) (0.1 ) 33 % (1.1 ) (0.8 ) (0.4 ) Net income (loss) 0.2 (2.2 ) 2.4 (109 )% (2.7 ) (11.8 ) $ (20.2 ) Noncontrolling interest in net income (loss) 0.1 (1.4 ) 1.5 (107 )% (1.9 ) (7.8 ) Net income (loss) attributed to common shareholders $ 0.1 $ (0.8 ) $ 0.9 (113 )% $ (0.8 ) $ (4.0 ) Operating margin 11.3 % 12.6 % 11.8 % 11.3 % (114.6 )% Capital expenditures *: Acquisitions of real estate $ - 6.7 (6.7 ) n/m - $ 33.3 $ - Development of real estate 75.9 56.0 19.9 36 % 192.0 122.4 7.6 Recurring real estate 2.2 1.6 0.6 38 % 2.9 2.2 0.1 Total $ 78.1 $ 64.3 $ 13.8 21 % $ 194.9 $ 157.9 $ 7.7 Metrics information: Colocation square feet* 1,200,132 992,000 208,132 21 % 1,200,132 992,000 921,000 Utilization rate* 88 % 85 % 3 % 4 % 88 % 85 % 81 % Loss per share - basic and diluted $ - $ (0.05 ) $ (0.06 ) $ (0.22 ) $ - Dividend declared per share $ 0.21 $ 0.16 $ 0.63 $ 0.48 $ - * See "Key Operating Metrics" set forth in our Annual Report on Form 10-K for the year ended December 31, 2013 for a definition of capital expenditures, CSF and utilization rate. 59-------------------------------------------------------------------------------- Table of Contents Revenue Revenue for the three months ended September 30, 2014 was $84.8 million, an increase of $17.3 million, or 26%, compared to the corresponding quarter in 2013. Revenue for the nine months ended September 30, 2014 was $244.0 million, an increase of $52.8 million, or 28%, compared to the corresponding period in 2013. These increases for both the three and nine month periods are primarily due to new customers and an increase in contractual monthly recurring revenue compared to the corresponding periods in 2013. As of September 30, 2014, we had 141 Fortune 1000 customers or private or foreign enterprises of equivalent size, compared to 128 Fortune 1000 customers or private or foreign enterprises of equivalent size as of September 30, 2013. Our capacity at September 30, 2014 was 1,200,132 CSF, which is an increase of 21% from September 30, 2013. The utilization rate of our data center facilities was 88% as of September 30, 2014, compared to 85% as of September 30, 2013. Recurring rent churn was 2.9% and 6.3% for the three and nine months ended September 30, 2014, respectively, compared to 1.0% and 2.8% for the three and nine months ended September 30, 2013, respectively. Costs and Expenses Property operating expenses-Property operating expenses were $33.0 million for the three months ended September 30, 2014, an increase of $8.8 million, or 36%, compared to $24.2 million for the corresponding quarter in 2013. Electricity expense increased approximately $5.6 million and interconnection expense rose $0.8 million due to a rise in demand for power and connectivity services from a growing customer base. Payroll costs increased $0.5 million due to an increase in headcount to support a 208,000 square foot increase in colocation space. Continued investment has grown our taxable asset base and has driven an increase in our property tax expense by approximately $0.3 million compared to the prior year quarter. For the nine months ended September 30, 2014, property operating expenses were $92.5 million, an increase of $23.6 million, or 34%, compared to $68.9 million for the corresponding period in 2013. Consistent with the three months ended September 30, 2014, increases over the past nine month period were due to more demand for power and connectivity of $16.9 million, increased property taxes of $3.3 million, and an increase in payroll costs of $0.6 million, all to support the 21% growth in colocation square feet capacity over the past year. Sales and marketing expenses-Sales and marketing expenses for the three months ended September 30, 2014 were $3.2 million, an increase of $0.9 million, or 39%, compared to $2.3 million for the corresponding quarter in 2013. The increase is primarily related to an increase in payroll and employee related costs of $0.6 million, along with higher advertising expenses related to marketing initiatives of $0.3 million. For the nine months ended September 30, 2014, sales and marketing expenses were $9.7 million, an increase of $1.7 million, or 21%, compared to $8.0 million for the corresponding period in 2013. Consistent with the three months ended September 30, 2014, increases over the past nine months were directly related to an increase in sales and marketing personnel related costs of $1.1 million and higher advertising costs of $0.5 million, both of which were used to promote growth in existing and new markets. General and administrative expenses-General and administrative expenses for the three months ended September 30, 2014 were $9.0 million, an increase of $1.8 million, or 25%, compared to $7.2 million for the corresponding quarter in 2013. The increases in the general and administrative related costs are primarily the result of increased payroll costs of $2.0 million including the impact of the LTIP of $0.7 million, partially offset by lower commercial insurance expense of $0.2 million. For the nine months ended September 30, 2014, general and administrative expenses were $24.7 million, an increase of $3.5 million, or 17%, compared to $21.2 million for the corresponding period in 2013. Consistent with the three months ended September 30, 2014, there was a $4.9 million increase in employee related expenses, including the impact of the LTIP of $1.6 million, which were partially offset by $0.8 million attributed to lower consulting fees and $0.4 million of reduced commercial insurance expense. Depreciation and amortization expense-Depreciation and amortization expense for the three months ended September 30, 2014 was $30.0 million, an increase of $6.1 million, or 26%, compared to $23.9 million for the corresponding quarter in 2013. For the nine months ended September 30, 2014, depreciation and amortization expense was $87.4 million, an increase of $18.8 million, or 27%, compared to $68.6 million for the corresponding period in 2013. The increase was driven by assets that were placed in service since September 30, 2013. Depreciation and amortization expense is expected to increase in future periods as we acquire and develop new properties and expand our existing data center facilities. Restructuring charges-For the three and nine months ended September 30, 2014, we incurred no restructuring charges. For the three and nine months ended September 30, 2013, we incurred $0.7 million of restructuring charges which were the result of moving certain administrative functions to the corporate office. 60-------------------------------------------------------------------------------- Table of Contents Transaction costs-For the three months ended September 30, 2014, we incurred no transaction costs, as compared to $0.7 million for the corresponding quarter in 2013. For the nine months ended September 30, 2014, we incurred $0.9 million of transaction costs which represent legal, accounting and professional fees, compared to $1.2 million of transaction costs incurred in the corresponding period in 2013. Transaction-related compensation-We recorded compensation expense of $20.0 million for the nine months ended September 30, 2013, related to CBI's long-term incentive plan. There were no such costs incurred in other periods and these 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. Operating Income For the three months ended September 30, 2014, operating income of $9.6 million improved $1.1 million compared to the corresponding period in 2013. The increase was due to increased revenue of $17.3 million and a decrease in restructuring charges and transaction costs of $1.4 million, which were partially offset by increases in property operating expenses of $8.8 million, depreciation and amortization of $6.1 million, general and administrative expenses of $1.8 million and sales and marketing expenses of $0.9 million. For the nine months ended September 30, 2014, operating income of $28.8 million improved $26.2 million compared to the corresponding period in 2013. The increase was due to increased revenue of $52.8 million and the impact of a $20.0 million transaction-related compensation charge from CBI in 2013 and other restructuring charges of $1.0 million, which were partially offset by increases in property operating expenses of $23.6 million, depreciation and amortization of $18.8 million, general and administrative expenses of $3.5 million and sales and marketing expenses of $1.7 million. Non-Operating Expenses Interest expense-Interest expense for the three months ended September 30, 2014 was $9.0 million, a decrease of $1.5 million, or 14%, as compared to $10.5 million for the corresponding quarter in 2013. Interest expense for the nine months ended September 30, 2014 was $30.4 million, a decrease of $1.8 million, or 6%, as compared to $32.2 million for the corresponding period in 2013. Interest expense decreased primarily as a result of an increase in capitalized interest. Loss on extinguishment of debt- Loss on extinguishment of debt represents the financing obligation for our Metropolis Dr. (Austin 2) facility as a result of our purchasing the property from the former lessor. A loss of $1.3 million was recognized upon the termination of this obligation for the nine months ended September 30, 2013. No such costs were incurred for the three and nine months ended September 30, 2014. Income tax expense-Income tax expense was $0.4 million for the three months ended September 30, 2014 as compared to 0.3 million for the corresponding quarter in 2013. For the nine months ended September 30, 2014, income tax expense was $1.1 million, as compared to $1.2 million for the corresponding period in 2013. Capital Expenditures Capital expenditures for the three months ended September 30, 2014 were $78.1 million, as compared to $64.3 million for the three months ended September 30, 2013. Our capital expenditures for 2014 relate to the development of power and space primarily in our Phoenix, Carrollton, San Antonio, and Houston markets, and Northern Virginia data center facilities. Capital expenditures were $194.9 million for the nine months ended September 30, 2014, as compared to $165.6 million for the nine months ended September 30, 2013. Our capital expenditures for 2014 relate to the continued development of power and space through expansions of our existing properties in primarily the same locations, in order to meet increased customer demands for IT infrastructure. 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 Credit Agreement. The Senior Notes are scheduled to mature in 2022 and bear interest at a rate of 6.375% per annum. Borrowings 61-------------------------------------------------------------------------------- Table of Contents under the Credit Agreement 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 Credit Agreement 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 settled with an equity contribution to the operating partnership. As part of the IPO, CyrusOne Inc. together with CyrusOne GP, purchased 21.9 million or (33.9%) of the outstanding partnership units of CyrusOne LP and CBI retained a 66.1% ownership, or 42.6 million Operating Partnership units in CyrusOne LP. As of January 24, 2014, CBI had the option to exchange the partnership units of CyrusOne into cash, or shares of common stock as determined by us, on a one-for-one basis based upon the fair value of a share of our common stock. We evaluated whether we control the actions or events necessary to issue the maximum number of shares that could be required to be delivered under the share settlement of these Operating Partnership units. Based on the results of this analysis, we concluded that these convertible Operating Partnership units met the criteria to be classified within equity. In addition, for each share of common stock issued by us, the Operating Partnership issued an equivalent Operating Partnership unit to the Company. To facilitate CBI's exchange of partnership units for shares, we have an effective resale registration statement on Form S-3 with the Securities Exchange Commission. As stock is issued by CyrusOne, CBI's ownership percentage will change. On June 25, 2014, CyrusOne Inc. completed a public offering of 15,985,000 shares of its common stock, including 2,085,000 shares of common stock issued upon the exercise in full by the underwriters of their option to purchase additional shares, at a price to the public of $23.25 per share, or $371.7 million. CyrusOne Inc. used the proceeds of $355.9 million, net of underwriting costs of $15.8 million, to acquire 15,985,000 common units of limited partnership interests in the Operating Partnership from a subsidiary of CBI. As a result, the Company's noncontrolling interest decreased by $166.9 million and CBI's ownership decreased to 40.8% as of September 30, 2014. In addition, the Company's additional paid in capital decreased by $189.0 million which represents the difference between the proceeds and the noncontrolling interest redeemed by CBI. In addition, we filed a universal shelf registration on Form S-3 with the Securities Exchange Commission that will allow us to publicly offer, from time to time, and sell debt securities, common stock, preferred stock, warrants, and rights and units. The securities will have a maximum aggregate offering price of $600 million or the equivalent thereof in foreign currencies. As of September 30, 2014, we have not used this universal shelf registration statement. On October 9, 2014, CyrusOne LP entered into a new credit agreement which provides for a $450 million senior unsecured revolving credit facility (the "New Revolving Facility") to replace the Company's $225 million secured credit facility, and a $150 million senior unsecured term loan (the "New Term Loan"). The New Revolving Facility is scheduled to mature in October 2018 and includes a one-year extension option, which if exercised by the Company would extend the maturity date to October 2019. The New Term Loan is scheduled to mature in October 2019. The New Revolving Facility will initially bear interest at a rate per annum equal to LIBOR plus 1.70% and the New Term Loan will initially bear interest at a rate per annum equal to LIBOR plus 1.65%. The New Term Loan may be drawn in up to three draws (including the drawing on the closing date) within six months of the closing date. The Company drew $75 million of the term loan at closing, of which $30 million was used to pay down the amount outstanding under the $225 million facility. The New Revolving Facility and the New Term Loan contain an accordion feature that allows the Company to increase the aggregate commitment by up to $300 million. As of September 30, 2014, and December 31, 2013, we had $30.4 million and $148.8 million, respectively, of cash and cash equivalents. Short-term Liquidity Our short-term liquidity requirements primarily consist of operating expenses and capital expenditures composed primarily of acquisition and development costs for data center properties. For the three and nine months ended September 30, 2014, our capital expenditures were $78.1 million and $194.9 million. As of September 30, 2014, we had borrowings of $30.0 million related to our revolver, leaving available borrowing capacity of $195.0 million. 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. We expect to fund future capital expenditures from the cash available on our balance sheet, availability under the new $450.0 million revolving credit facility, and proceeds from the new $150.0 million term loan. Long-term Liquidity Our long-term liquidity requirements primarily consist of distributions to stockholders and the acquisition and development of additional data center properties. We expect to meet our long-term liquidity requirements with cash flows from our operations, issuances of debt and equity securities and borrowings under our new Credit Agreement. 62-------------------------------------------------------------------------------- Table of Contents As of September 30, 2014, our debt and other financing arrangements were $624.3 million, consisting of $525.0 million of Senior Notes due 2022, $30.0 million of revolver debt, capital lease obligations of $14.2 million and other financing arrangements of $55.1 million. Cash Flows Comparison of Nine Months Ended September 30, 2014 to Periods Ended September 30, 2013 and January 23, 2013 Cash provided by operations was $88.3 million for the nine months ended September 30, 2014, an increase of $23.5 million compared to the nine months ended September 30, 2013. The increase in net cash generated from operations was primarily the result of income from leasing incremental space, power, and related services as compared to the nine months ended September 30, 2013. Cash used in investing activities was $194.9 million for the nine months ended September 30, 2014, compared to $159.3 million for the nine months ended September 30, 2013. This increase is a result of capital expenditures for development activities. Cash used in financing activities was $11.8 million million for the nine months ended September 30, 2014, compared to $291.2 million provided by financing activities for the same period in 2013. The significant change is primarily attributed to net proceeds related to the issuance of common stock of $337.1 million in January of 2013. In addition, we paid $16.7 million more of dividends during the nine months ended September 30, 2014. These impacts are partially offset by $30.0 million in borrowings under our previous credit facility and the impact of payments of $19.8 million to buyout capital leases and other financing arrangements in the nine months ended September 2013. Distribution Policy CyrusOne Inc. is required to distribute 90% of its taxable income (excluding capital gains) on an annual basis in order 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. 63-------------------------------------------------------------------------------- Table of Contents |