Source: Google Images

Company Buy Recommendation: CyrusOne, Inc.Symbol: CONE

Analysts: Carl Schiro Tom O’Connellcschiro@nd.edu toconne2@nd.edu

Company Overview

Sources: S&P CapIQ, CONE FY 2016 10-K

Background

Revenue Breakdown

Basics of Real Estate Valuation• CyrusOne is headquartered in

Carrollton, TX and operates 33 data center facilities across the United States, United Kingdom, and Singapore

• Between 2001 and 2010, the company was strictly a regional player, largely constrained in Texas

• After converting the company into a REIT in 2013, CONE’s stock price has increased 163%, among the best of any publicly traded REIT.

Background on Data Centers

Sources: S&P CapIQ, Oracle Corporation FY 2016 10-K

Key Terms

• Data Centers highly specialized buildings which house large scale storage and server facilities that power the internet and corporate world.

• Data Centers have an abundance of power supply as well as infrastructure to prevent the servers from being taken offline.

• They also are connected to large scale fiber optic networks to supply the appropriate bandwidth for internet connection.

• Full scale and modern data centers can cost over 1,200$ a month/sq foot.

• Enterprise Data Center: Centers which serve the needs of Corporate IT centers/departments and large scale internet enterprises. These facilities are more exposed to competition than network dense data centers.

• Megawatt (MW): A scale of energy/power consumption. Equivalent to 1 Million Watts. Data Centers use power consumption to scale usage. Large scale facilities can use up to 40 MW which would be enough to power 40,000 homes.

• Turn Key: Data center fully built out and ready to be utilized immediately

• Powered Shell Center: A data center which has tenants supply hardware

• Network Dense Data Center: A data center which acts as a key hub and switch for internet as well as server connectivity. Network dense data centers are extremely rare, hard to replicate and exhibit major pricing power. Considered to be the data center equivalent of high productivity malls

• Interconnection: The act of multiple tenants of data centers also serving as key internet connection hubs as well as storage facilities for their clients

Industry Overview

Critical Components

Sources: S&P CapIQ, Oracle Corporation FY 2016 10-K

Continued

• High Speed Fiber Optic Connection: Data Centers require major infrastructure to ensure high speed and availably when requesting data

• Complex Power Systems: In order to prevent shut down from power loss or overheating, centers have numerous fail safe systems to ensure they never go offline

• AC Systems: Servers, especially when in close proximity to each other, run at very high temperatures. Powerful AC units ensure hardware stability and prevent overheating

• Telecommunication: High speed fiber optic network cabling directly to the data center ensures maximum connection speed from remote and nearby locations

• Specialized Building: Raised flooring for cabling, electrical wiring/failsafe infrastructure. Also directly connected with fiber optic lines

• High Security/Data Backup: Data centers contain millions of GBs of critical data which is necessary to protect. Security measures similar to that of a power plant are common among data centers. Data backup is critical in the case of potential natural disaster or catastrophic data loss

• Fireproofing: Due to the high temperature the hardware operates at and gives off, there is an inherent risk of fire. Elaborate fire protection systems as well as fire proofing are critical to datacenters

• Processing Power: Data Centers often are used as both major internet connection switches as well as remote storage. Data Centers need the processing power to support both simultaneously

Components

Strategic Positioning

Source: CONE FY 2016 10-K

Strong Customer Base Massively Modular Construction Models

Strategically Located Portfolio

• Have domestic properties in 6 out of the top 10 largest U.S cities by population and 5 out of the top 10 for Fortune 500 HQs

• Acquisition of Cervalis in NY Metropolitan area (4 Data Centers) gives company huge access to Wall Street

• Acquisition of CME Group in Chicago adds more than 428,000 SF and a facility that processed over 3.5 billion transactions in 2015

• Proprietary design principles allow CONE to efficiently stage construction on large scale and deliver critical power and colocation SF (CSF) in a time frame that is among industry best

• Recent Build-to-Market Powered Shell facility has decreased from 8 to 6 months, and New Data Hall has decreased from 16 to 12 weeks

• Allows cost of delivery to be less than $6.5M per MW, below industry levels of $7M per MW

Growth Strategy

Source: Wall street Journal, Forbes

Increase Revenue from Existing Customers

• Many existing customers still have infrastructure needs that have not been outsourced, which will require more space

• Over 50% of current revenue growth is from existing customers

• Utilization rate is 86% across portfolio; expected to increase to 95% within 2 years

• Lease escalators up 2-3% over next two years (85% signed in last period have them)

• Can grow to of 3.5x current size with existing development of existing powered shell & land • Planning on expanding into Northern

Virginia, Dallas, and Pacific Northwest (all locations characterized as “mature growth” by Stifel) among others in 2016 & beyond

• Recent Development Yields- San Antonio 1: 18%, Carrollton: 16%, Phoenix 1 & 2: 15%, Houston 2: 18%, Northern Virginia: 15%

• Further expansion into Phoenix and Chicago met with recent skepticism; however, all 100% preleased

Attracting and Retaining New Customers• Increased complexity of managing Data

Centers are beginning to be recognized by companies, so more will begin to outsource needs

• Currently, Fortune 1000 customers spend $270 million on needs, however; management says this number could increase to $2.7 billion in near future

• 97% service ticket satisfaction rate; 95% of customers recommend CONE to others

New CustomersExpanding into New Markets

Growing Interconnection & Power Business

• Interconnection revenue was up 56% in Q1 2016 and 83% of all contracts signed in period included interconnection product

• 11,000+ cross connects included in portfolio, which is a 350% increase from 2012

• Interconnection only accounts for 6% total revenue for CONE compared to 13% for COR and 16% for DLR, showing room for significant growth

• All of the new customers who took metered power contracts had 7% admin fee included, which will boost power reimbursement line

RisksReduction in Business Lease Termination

Building OwnershipElectric Power/Cooling Capabilities

• Significant portion of customers are in industries that experience volatility, specifically information technology (29% of revenue), financial services (21% of revenue), and energy (20% of revenue)

• If any customer becomes a debtor under U.S Bankruptcy Code, laws may limit company’s ability to terminate contract or recover any amounts owed to us under agreements with specific tenant

• Power and cooling systems are difficult and expensive to upgrade

• Failure to timely upgrade or add additional infrastructure could result in decreased occupancy rates or density within current facilities

• Even if successful in implementing changes, CONE may not be able to pass on additional costs to customers

• Significant portion of customer leases that expire this year are on month-to-month basis, and many of them contain early termination provisions

• As of December 31, 2015, leases representing 24%, 16%, and 24% of the annualized rent portfolio will expire during 2016, 2017, and 2018, and an additional 1% of the annualized rent for portfolio were month-to-month leases

• Cyrus One does not own all of their buildings, which leaves them as a risk for altering revenue growth.

• 16 buildings are not own that account for 700,000 NRSF, 24% of total portfolio, and 33% of total revenue

Industry Overview

Source: S&P CapIQ

Cloud Computing Demand Competitors

EPS Growth (Historical and Expectd)

Digital Realty Trust (DLR)• Digital Realty was the first public Data Center

REIT (’04). • Owns a diverse portfolio with a large presence

in network dense areas—which prove to be some of the most valuable and lucrative areas for Data Centers

• Recent earnings took a dip in mid-2015 • They are evenly spread across NY, VA, Dallas,

London, and San Fran. Average Cost of Capital

• Cloud computing accounted for 50% of MW signed in 2016

Increase in Data

Competitors

CoreSite Reality (COR) • Formed in 2001 with an IPO in 2010, CoreSite is

a major provider for cloud based storage as well as other server needs for tech companies.

• Tom Ray, CEO, announced plans to retire at the end of September ’16, and market doesn’t anticipate CoreSite’s main strategy to change.

• Current NAV/share is 60.50$.

DuPont Fabros (DFT)• IPO in 2007, DuPont typically handles large

scale customers on wholesale scale. • Current market strategy of dealing with

wholesale leasing is well built for the current market that Data Center REITs are currently operating in.

• Also is also currently operating at a NAV premium and is using this as a method to approve internal development (around 10% of portfolio)

Discounted Cash Flow

9

DCF model$ in millions 2012 2013 2014 2015 2016E 2017E 2018E 2019E 2020ETotal Revenue $220.8 $263.5 $330.9 $399.3 $554.6 $623.3 $735.0 $815.5 $899.7

Revenue Growth 21.5% 19.3% 25.6% 20.7% 38.9% 12.4% 17.9% 11.0% 10.3%Expenses

Property Operating Expenses 76.0 88.4 124.5 148.7 199.3 229.4 284.5 313.9 343.2Sales and Marketing 9.7 9.9 12.8 12.1 18.7 15.6 16.0 16.5 17.0General and Administrative 20.7 26.5 34.6 46.6 64.7 85.4 106.7 116.3 128.7Depreciation and Amortization 73.4 89.9 118.0 141.5 174.5 189.8 224.1 244.2 270.2Other Expenses 24.7 4.8 1.0 27.6 3.8 2.0 4.0 3.8 3.9Operating Expenses 204.5 219.5 290.9 376.5 461.0 522.2 635.2 694.6 763.0Operating Income 16.3 44.0 40.0 22.8 93.6 101.1 99.8 120.9 136.7NOI 144.8 175.1 206.4 250.6 355.3 393.9 450.5 501.6 556.5Margin 65.6% 66.5% 62.4% 62.8% 64.1% 63.2% 61.3% 61.5% 61.9%Stock based comp 10.0 10.0 10.0 12.0 14.0 14.0 18.0 18.0 18.0Adjusted EBITDA 99.7 143.9 168.0 176.3 282.1 304.9 341.8 383.0 424.9Margin 45.2% 54.6% 50.8% 44.2% 50.9% 48.9% 46.5% 47.0% 47.2%Interest Expense (38) (40) (40) (41) (54) (66) (67) (69) (70)Net income -21.7 4.0 0.0 -18.2 39.6 35.1 32.8 51.9 66.7Add: D&A 73.4 89.9 118.0 141.5 174.5 189.8 224.1 244.2 270.2Less: CAPEX (205.0) (205.0) (205.0) (205.0) (205.0) (205.0) (205.0) (205.0) (205.0)Free cash flow -153.3 -111.1 -87.0 -81.7 9.1 19.9 51.8 91.0 131.9Growth -27.5% -21.7% -6.1% -111.2% 117.7% 160.3% 75.6% 44.9%

Unlevered Free Cash FlowWACC 6.52%Discount Period 1 2 3 4 5Discount Factor 0.94 0.88 0.83 0.78 0.73

Present Value of Free Cash Flow $8.6 $17.5 $42.9 $70.7 $96.2

Comparable Analysis

10

CONE DuPont DLR COR

Nominal NOI 355.29 Nominal NOI 364 Nominal NOI 1,355 Nominal NOI $249Nominal Cap Rate 7.00% Nominal Cap Rate 7.80% Nominal Cap Rate 7.00% Nominal Cap Rate 7.40%Capex Reserve 18.40% Capex Reserve 20.00% Capex Reserve 17.70% Capex Reserve 17.50%Economic Cap Rate 5.71% Economic Cap Rate 6.20% Economic Cap Rate 5.70% Economic Cap Rate 6.10%Operating Real Estate Value $5,075.64 Operating Real Estate Value 4699 Operating Real Estate Value 19,473 Operating Real Estate Value 3,379

Operating Real Estate $5,075.64 Operating Real Estate Operating Real Estate $19,473 Operating Real Estate $3,379Development $380.00 Development $217 Development $867 Development $316Other $87.70 Other $224 Other $1,698 Other $41Total Assets $5,543.34 Total Assets $5,139 Total Assets $22,039 Total Assets 3,737

Debt - Market Value $945.90 Debt - Market Value $1,251 Debt - Market Value $6,760 Debt - Market Value 508Other $428.10 Other $175 Other $667 Other 175Preferred Stock - Market Value $0.00 Preferred Stock - Market Value $227 Preferred Stock - Market Value $1,445 Preferred Stock - Market Value 121Total Liabilities $1,374.00 Total Liabilities $1,653 Total Liabilities $8,871 Total Liabilities 804

NAV 4,169 NAV 3,486 NAV 13,167 NAV 2,932Diluted Share Count 72.2 Diluted Share Count 90.2 Diluted Share Count 165 Diluted Share Count 48.5NAV/share $57.75 NAV/share $38.75 NAV/share $80 NAV/share 60.5

Market Share Price 48.33 Market Share Price $42.36 Market Share Price $96.84 Market Share Price $76.95Premium/Discount 19.49% Premium/Discount 9.32% Premium/Discount 21.05% Premium/Discount 27.19%

Catalysts and Portfolio StrategyUpside Recommendation

Downside

• Strong Strategic Positioning in Market with extremely high growth rate in future

• Growing Interconnection & Power Reimbursement Revenue lines will provide substantial growth in near future

• Continued Patterns of Acquisition of Existing/New Customers and Further Development

CyrusOne, a stock that has experienced significant growth over the last five years, will continue to do so in the coming years. Their strong position in a market with two exponential demand drivers bodes well for the company. Currently, they are the only Data Center REIT trading at a discount to NAV, so value remains to be seen in their current share price. Therefore, I recommend the Notre Dame Investment Club purchase a stake in CONE at a final implied share price of $55.50.

• New Supply Begins to outrun demand in Data Center REIT Industry

• Potential of growing Churn Rate with customers experiencing increases in Lease Rate

• Failure to continue to grow Market Share as rates as high as the past

NAV/Share 57.75$ 75%DCF 48.35$ 25%Target Price 55.40$ 100%

Final Implied Price

Appendix 1: Income Statement

Source: S&P CapIQ

I ncome Statement

For the Fiscal Period Ending 12 monthsDec-31-2011

Reclassified12 months

Dec-31-201212 months

Dec-31-201312 months

Dec-31-201412 months

Dec-31-2015

LTM12 months

Jun-30-2016Currency USD USD USD USD USD USD Rental Revenue 181.7 220.8 263.5 330.9 399.3 472.4 Tenant Reimbursements - - - - - -Other Revenue - - - - - - Total Revenue 181.7 220.8 263.5 330.9 399.3 472.4

Property Exp. 60.5 78.5 93.2 124.5 147.3 168.1 Selling General & Admin Exp. 21.6 30.4 38.6 47.4 52.7 65.1 Depreciation & Amort. 55.5 73.4 95.2 118.0 141.5 163.0 Amort. of Goodw ill and Intangibles - - - - - -Other Operating Exp. 3.5 3.2 - - - - Total Operating Exp. 141.1 185.5 227.0 289.9 341.5 396.2

Operating Income 40.6 35.3 36.5 41.0 57.8 76.2

Interest Expense, Total (32.9) (41.8) (43.7) (39.5) (41.2) (47.7) Interest and Invest. Income - - - - - - Net Interest Exp. (32.9) (41.8) (43.7) (39.5) (41.2) (47.7)

Other Non-Operating Inc. (Exp.) - - 0.1 - - - EBT Excl. Unusual Items 7.7 (6.5) (7.1) 1.5 16.6 28.5

Restructuring Charges - - (0.7) - (1.4) 8.0 Total Merger & Rel. Restruct. Charges (2.6) (5.7) (1.4) (1.0) (14.1) (7.1) Impairment of Goodw ill - - - - - -Gain (Loss) On Sale Of Assets - 0.1 (3.0) - - -Asset Writedow n - (13.3) - - (13.5) (13.5) Other Unusual Items (1.4) - (21.3) (13.6) (6.0) (6.0) EBT Incl. Unusual Items 3.7 (25.4) (33.5) (13.1) (18.4) 9.9

Income Tax Expense 2.2 (5.1) 2.3 1.4 1.8 1.7 Earnings from Cont. Ops. 1.5 (20.3) (35.8) (14.5) (20.2) 8.2

Earnings of Discontinued Ops. - - - - - -Extraord. Item & Account. Change - - - - - - Net Income to Company 1.5 (20.3) (35.8) (14.5) (20.2) 8.2

Minority Int. in Earnings - - 10.3 6.7 4.8 0.9 Net Income 1.5 (20.3) (25.5) (7.8) (15.4) 9.1

Appendix 2: Balance Sheet

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Appendix 3: Statement of Cash Flows

QUESTIONS?Don’t hold back, regardless of your level of experience!