CyrusOne Inc

Good day and welcome to the CIRES I LLC third quarter 2019 earnings conference call and webcast. All participants will be in listen only mode. Should you need assistance, please signal a conference specialist by pressing the star key followed by zero. After today's presentation, there will be an opportunity to ask questions. To ask a question, you may press star then one on a touch tone phone. To withdraw your question, please press star then two. Please note this event is being recorded. I would now like to turn the conference over to Michael Schaefer. Please go ahead.

Thank you, Sarah. Good morning, everyone, and welcome to Cyrus One's third quarter 2019 earnings call. Today, I am joined by Gary Wojtaszek, President and CEO, and Diane Moorfield, CFO. Before we begin, I would like to remind you that our third quarter earnings release, along with the third quarter financial tables, are available in the investor relations section of our website at Cyrus1.com. I would also like to remind you that comments made on today's call and some of the responses to your questions deal with forward-looking statements related to Cyrus1 and are subject to risks and uncertainties. Factors that may cause our actual results to differ from expectations are detailed in the company's filings with the SEC, which you may access on the SEC's website or on Cyrus1.com. We undertake no obligation to revise these statements following the date of this conference call, except as required by law. In addition, some of the company's remarks this morning contain non-GAAP financial measures. You can find reconciliations of those measures to the most comparable GAAP measures in the earnings release, which is posted on the investor section of the company's website. I would now like to turn the call over to our president and CEO, Gary Wojtaszek.

Thanks, Schaefer, and welcome to Cyrus One's third quarter earnings call. Let me start by saying that while we've had some pretty good quarterly results over the last couple years and a few that had larger bookings numbers, I can't recall a quarter that was stronger than this one given the large number of both financial and operational accomplishments. And I'm excited about the position we are in as we begin to look ahead to 2020. Slide four shows the growth rates for revenue adjusted EBITDA, normalized FFO, and normalized FFO per share. We're all very strong in the quarter and are materially above the peer group in broader REIT averages. This was, in my view, the best leasing quarter in the company's history with $52 million in annualized revenue signed and the most diversification we have ever had across markets, verticals, and product types, including a big contribution from Europe. Our backlog is nearly $55 million, de-risking our growth in 2020. We have development activity across our markets in both the US and Europe, in response to the strong customer demand we are tracking. We also recently acquired 20 acres of land in Iowa in connection with the lease to deliver a unique hybrid cloud solution for enterprises, allowing us to provide the private cloud leg through an architecture that is significantly more efficient than the traditional on-ramp compute node network topology. Lastly, as you know, we have been focused for years on getting to investment grade, which will be incredibly important to our future success. Slide five provides more color on the leasing results, and as I just mentioned, it was very broad-based in both the US and Europe. There were a couple of larger deals, but the biggest was only 5.5 megawatts, and seven markets had at least one megawatt of leasing, which highlights the benefit of having a geographically well-diversified portfolio. We continue to have tremendous success leasing to enterprises, and this quarter we signed a record $23 million in annualized revenue to enterprise customers, which is 40% above our prior record. It's always been a little surprising to me that so many investors view us as a hyperscale data center company, seemingly forgetting that the majority of our revenue is generated from enterprise companies. We have always made the necessary investments in our sales and operational capabilities to serve the needs of the enterprise, which is expensive, difficult to do, and time consuming, and which are the exact reasons why so many other companies shy away from this market and just want to focus on the hyperscalers. The benefits of these investments are easy to see as we have generated record enterprise sales over the last four quarters, which was particularly important as the hyperscale companies slowed their purchases. We expect continued strong growth from enterprises in the coming years and are better positioned to capitalize on this demand than many other providers, especially as we now have a much larger international footprint. That said, we expect that demand from hyperscalers will begin to increase towards the second half of 2020, and we expect these companies will continue to contribute significantly to our growth as we expand internationally. Moving to slide six, as you can see, our European business has really taken off. We expected to do well when we decided to expand into Europe, and fortunately, we are doing even better than we had originally anticipated. We made the decision to build the European platform after receiving so many requests from our hyperscale customers to develop our product in Europe, which historically has been an interconnection-focused data center market that lacked the large-scale data center deployments that Cyrus One is well known for delivering in the US. While our original underwriting assumed we would leverage our hyperscale business to initially grow the European market, we are absolutely focused on developing equally strong enterprise and IEX businesses there similar to what we built in the US. This will take a few years to develop, but we know that the returns are well worth it. Europe revenue grew 81% year-over-year and is now $70 million on an annualized run rate basis, which is nicely ahead of our expectations. Year-to-date, we have signed nearly $40 million in annualized revenue, which represents over 40% of our total year-to-date bookings and is really strong considering that we haven't even launched our Irish or Netherlands facilities which will double the size of our portfolio in Europe. We're developing over 50 megawatts across all the key European markets combined with the European capacity. Once these projects are completed, we will have nearly 150 megawatts in Europe, which represents nearly 20% of our overall prospective footprint. As I mentioned when we were launching our European expansion, I wanted Europe to be about 25% of our revenue in three years, and we are executing according to that plan. Slide seven provides an update on another substantial business that we have organically built from the ground up that also never seems to get much attention, which is our interconnection business. Similar to our strength in the enterprise market, our interconnection business also seems to get overlooked. As of this quarter, it's generating $50 million of annual revenue and it grew 24% year over year, which I believe is the fastest growing interconnection business in the industry. We have seen consistently strong growth in our IX business, which is the result of a noticeable change in data center network topology that is underway. The change in topology is being driven by the growing importance of compute and storage nodes. In the early days of the internet, eyeball acquisition was the primary motivator for companies that were looking to distribute their product to customers over the internet, which in turn placed a high value on establishing interconnected data centers. However, What we are seeing now is that data is becoming the new gold of the Internet, and as data sets become so large, they are becoming these digital black holes that continue to grow at an exponential rate. The network nodes that dominated the growth of the data center industry for the first 30 years are becoming less relevant and we believe will be subsumed into hyperscalers, compute, and storage nodes, which will be where the next wave of Internet value creation comes from. All the potential value creation that people believe will be generated from artificial intelligence will primarily be generated in the compute and storage nodes of the data center, and to a lesser degree, in the network nodes. This is a trend that has just started and we believe will only accelerate over the next five years, playing to Cyrus One's core competencies of building massively scaled, low-cost data centers. The recent development we have announced in Iowa is a validation of this trend. whereby we will build an enterprise data center in close proximity and connect it with a direct fiber path to a leading hyperscalers compute and storage nodes, which will be used for hybrid cloud deployments. It will bypass an interconnection facility, driving significant improvements in performance, cost, and security for these developments, making it a very attractive value proposition for enterprises, particularly those with the massive data sets I referenced earlier. Turning to slide eight, we have been showing these property level development yields for years, including the past several quarters. This quarter, we wanted to highlight Austin III, which has 60,000 square feet of raised floor and additional capacity for growth. It was commissioned in the fourth quarter of 2015, and the yield progression is very similar to the yield progression of the other facilities on the slide that we have shown recently. All of these started negative when we delivered the initial capacity and were in a lease-up phase. and over time they progressed to the mid to upper teens range. This is the trend we have seen throughout our markets for years and it's the reason we continue to make investments across the portfolio as they are highly accretive. I continue to share these development yields slides every quarter as I think it's important for investors to understand the yield progression of our properties. We continue to invest in organic growth and expansion activities with 13 expansion projects across 10 markets and five countries. These projects will initially generate negative yields, but in every investment we have shown, the yields turn positive and start generating great returns, and we expect that trend to continue. I would point out that excluding acquisition-related funding, 100% of the equity raises we have done over the past 24 months has produced massive value creation for shareholders despite the initial dilution. Our investment in OData has meaningfully increased in value as the company has gone from having two megawatts of contracted power to more than 14 megawatts and still remains in the early stages of expansion. Ricardo and the team have ambitious goals expanding outside of Brazil, more recently into Colombia, and most recently into Mexico. Similarly, we have also created tremendous value by our GDS partnership, which continues to be the fastest growing data center company in the world. William and the team are managing an incredible ride over there, trying to stay on top of really strong growth rates. Slide nine highlights the significant outperformance for the quarter compared to the peer data center REIT group and the broader REIT universe. We are growing in the 20% range across all of our key financial metrics, which is three times faster than our peers and substantially faster than other REITs. The reason we have consistently been delivering industry-leading financial performance is because we have methodically and consistently invested a substantial amount of capital in line with the customer demand we are generating. This quarter, you are seeing the convergence of our FFO per share growth with revenue and EBITDA growth, which is the result of the incremental operating leverage we generate as our initial developments, which are all essentially equity funding, get sold out, which drives significant value creation across our assets, as I highlighted on the previous slide. Given that we currently have the capacity to triple the size of our footprint with powered shell and land inventory, we should be able to generate additional value for customers for years. The last thing that I want to discuss is the achievement of being given an investment grade rating. For those of you who have been involved in Cyrus One since our IPO, you know that one of my objectives has always been to obtain an investment grade rating. This was something that I had in my original business plan that I developed 10 years ago, and it's the only objective from that plan that I hadn't achieved. In fact, we have exceeded every other financial and operational objective by a large margin, except for getting an investment grade rating. So this is something that is personally one of the most rewarding accomplishments we have achieved, basically because it's taken us so long to do it. As I have mentioned in the past, all of our customers are concerned about the financial strength of their data center partners as they're entering 10 to 15 year contracts with us and need to know that their partners are financially secure as they are. For reference, there are only about 400 investment grade companies in the country, so we're one of the few companies that have an investment grade designation. In closing, the business is firing on all cylinders. We had a tremendous leasing quarter on sitting at $92 million in bookings year to date, so we've already achieved our $20 to $25 million quarterly guidance for the year through the first three quarters. Our decision to expand in Europe was clearly the right one as that business is growing very quickly, and you are now beginning to see the benefits of the investments we have made there. Combined with our business partnerships in Asia and Latin America, we have established ourselves as one of the very few providers that can meet our customers' needs across the world. We are also in the strongest financial position in our company's history, which will support a robust set of growth opportunities while lowering our cost of capital. Lastly in the quarter, we became the number one best performing REIT in the RMZ as measured from the time of our IPO. Before I turn the call over to Diane, who will provide more color on our financial performance for the quarter and update our guidance, I want to discuss some market rumors. As you may be aware, several media outlets have reported and some of you have speculated that we were in discussions with various third parties regarding a potential sale of the company. We are not currently pursuing a sale of the company. We remain focused on our strategy and creating long-term shareholder value. We do not intend to have any further comments on the recent media reports and market rumors, but look forward to discussing our results for the quarter. I will now turn the call over to Di. Thank you.