CyrusOne Inc

Good day and welcome to the CIRES I Second Quarter 2021 Earnings Call. All participants will be in listen-only mode. Should you need assistance, please visit your 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 your touchtone 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, VP of Capital Markets and Investor Relations. Please go ahead.

Michael Schaefer Thank you, Grant. Good morning, everyone, and welcome to Cyrus One's second quarter 2021 earnings call. Today, I am joined by Dave Ferdman, President and CEO, Catherine Motlock, CFO, and John Hatem, COO. Before we begin, I would like to remind you that our second quarter earnings release along with the second quarter financial tables, are available on 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 cirrus1.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, Dave Ferdman.

Thank you, Michael, and welcome to Cyrus One's second quarter earnings call. As announced yesterday afternoon, the board has separated with Bruce Duncan as president and CEO. This was not related to any matter regarding the company's operations, financial conditions or results, or the business more broadly, including the strategy. The board recognizes Bruce's many contributions during the past year, And on their behalf, I would like to thank him for his service and leadership. I will be serving as President and CEO on an interim basis while the Board undertakes a search to identify the company's next President and CEO. As some of you may know, I was co-founder of Cyrus One more than 20 years ago. I served as the President and CEO from 2000 until June of 2010 when the company was sold to Cincinnati Bell and then I served as the chief strategy officer until the IPO when I transitioned to the Cyrus One board. I am a member of the board's executive committee and have previously served on the transaction committee. I look forward to leveraging my knowledge of the industry, my continued relationships with customers and employees, and working with the team to continue to drive profitable growth. We have a great platform, great customer base, and the demand outlook remains strong and the business is well-positioned. Moving to the quarter. Beginning with slide four, you can see our key second quarter financial metrics, which Catherine will discuss shortly. We had strong leasing results, which included contributions from both hyperscale and enterprise customers across our European and U.S. markets. We signed approximately 21 megawatts, totaling $41.8 million in annualized GAAP revenue. Our revenue backlog increased to a record $129 million as of the end of June, with a total contract value of nearly $1.1 billion, equating to a weighted average lease term of more than eight years. Turning to slide five, we continue to take steps to support our growth. We completed construction on 146,000 co-location square feet, totaling 45 megawatts across our U.S. and European markets, including Dublin, London, Northern Virginia, and San Antonio. Our development pipeline consists of 280,000 co-location square feet totaling 64 megawatts, slightly weighted towards Europe, including two new projects in London. We are excited to announce our expansion into Madrid. Madrid is one of the fastest growing data center markets in Europe with the purchase of approximately five acres of land that will provide an estimated 21 megawatts of power capacity. I look forward to talk more about this in a few minutes. We further strengthened our balance sheet through the execution of our inaugural green senior notes offering issuing 500 million Euro with a tenor of seven years priced to yield just over 1.3%. We also raised $232 million in forward equity through our ATM program during the quarter. And as of the end of June, we had nearly $520 million in available forward equity to fund our development and manage our leverage. Moving to slide six, Forty-one million dollars in annualized gap revenue signed was up 27 percent compared to the four-quarter average, prior four-quarter average. As we've discussed before, the weighted average MRR per kilowatt signed for any quarter is largely a function of the leasing mix. In contrast to the first quarter, in which leasing was more heavily weighted towards hyperscale customers, and primarily in our U.S. markets, In the second quarter, we had more significant contributions from enterprise customers and our European markets. Approximately one-third of our bookings was from enterprise customers, and approximately 60 percent of the leasing was in Europe. Consistent with the trend over the last several years, the revenue contribution from our hyperscale customers continues to increase, representing approximately 53 percent of our portfolio rent at the end of the quarter. Slide seven provides an update on our interconnection results as well as some of our key portfolio metrics. As the right-hand side of the slide shows, we continue to make good progress on ESG initiatives. In addition to executing the Green Notes offering, we have achieved 100% renewable energy in Europe, well ahead of the 2030 target set forth in the EU Climate Neutral Data Center PAC. Turning to slide eight, We provide an update on Europe. I mentioned our entry into Madrid, and we think there's great opportunity in this market. It is the fastest-growing data center market in Europe outside of the core flap D markets with an estimated 66 megawatts of take-up in 2020. Our hyperscale customers have been expanding here, and as we've talked about, it's important for us to be able to offer solutions to these customers in as many markets as possible. The more valuable we can be to them with broad geographical product offering, particularly in Europe where it can be challenging to secure capacity, the more opportunities we have to win their business going forward. We are now in six markets in Europe, up from two when we entered in late 2018. Upon completion of the projects in our development pipeline, we have more than 200 megawatts of power capacity in Europe, representing approximately 20 percent of our total portfolio. We signed approximately 25 million in annualized revenues in these markets during the quarter. The leasing was broad-based geographically with Dublin, Frankfurt, and London each accounting for more than two megawatts signed. We continue to see good demand in Europe, and it's up to us to ensure we have the capacity across our markets and to convert opportunities into signed leases. Moving to slide nine, we are well-positioned heading into the second half of the year. As of the end of June, our development pipeline was 86 percent pre-leased on a co-location score footage basis, which is a near all-time high. As a result, we have meaningfully decreased the risk of our investments. And upon completion of these projects and commencement of the leases, we will be generating attractive returns. Additionally, we have significant embedded contractual revenues as a result of our quarter-end backlog. The backlog is equivalent to approximately 14 percent of our trailing 12-month base revenue. As Catherine will discuss, not all this backlog will contribute to next year's financial results. However, the impact of the backlog, combined with the full-year 2022 impact of leases that commenced earlier this year, plus the impact of future leasing, sets up us well for continued growth next year. We have shell and land inventory across our markets in the U.S. and Europe to support our growth. with more than 1,250 megawatts of potential built-out power capacity. This inventory is primarily in digital gateway markets, which are the higher-growth GDP centers in which demand is concentrated, giving us significant runway for future growth. And with nearly $2.3 billion in available liquidity, as of the end of the quarter, we have funding capacity to support near-term opportunities while maintaining significant financial flexibility and a strong balance sheet. In closing, we remain very bullish on the industry and our business, and we're seeing continued strong demand in both Europe and the U.S. We are well positioned to capitalize on opportunities, and the team is focused on consistent execution and providing outstanding service to our customers. With that, Catherine will now provide more color on our financial performance for the quarter and an update on our guidance for the year. Catherine.

Thank you, Dave. And good morning, everyone. Continuing with slide 11, revenue growth for the quarter was positively impacted by a 43% increase in metered power reimbursements, primarily driven by higher usage across both our United States and European markets. Excluding metered power reimbursements, revenue growth was approximately 6%. Additionally, because these reimbursements are an expense pass-through, the disproportionately higher growth in this line item had a negative impact on our margin. Excluding needed power reimbursement, our NOI and adjusted EBITDA margins decreased year-over-year by 1.5 and 1.1 percentage points, respectively. The year-over-year comparison is affected by the positive impact of the last year's second quarter results of the receipt of $3 million in lease termination fees, while in the second quarter of this year, we received $400,000 in lease termination fees. On last quarter's call, I mentioned that second quarter churn was expected to be higher than churn in each of the last two quarters of the year. However, some rate churn that we anticipated to occur this quarter has been pushed out. As a result, second-quarter churn of 0.8% was lower than we had forecasted, but we continue to expect full-year churn to be in the range of 4% to 6%. At our investor day, we discussed our view on renewal spreads over the next few years, and we have shown these rate impacts for like-for-like renewals in the second quarter. The like-for-like renewal population for this quarter was relatively small, and the weighted average rate on these renewals was up 4% on a gap basis and was flat on a cash basis. These spreads were positively impacted by the push-out of the rate churn that I just mentioned. Turning to slide 12, the contribution from Europe continues to increase as leases commence. with these markets currently representing approximately 14% of our total rent. We brought our first data center in Dublin online during this quarter, and we are pleased to report that the first data hall is fully leased. The addition of this market to our portfolio further enhances the geographical diversification of our business. Moving to slide 13. We have developments underway across our United States and European markets, totaling 280,000 collocation square feet and 64 megawatts, slightly weighted towards Europe. As Dave noted, these developments are 86% pre-leased on a collocation square footage basis, significantly de-risking our capital investments. We also have 303,000 square feet of powered shell under construction in Paris and London. The total cost to complete the project in our pipeline is $318 million at the midpoint of our estimated range. And upon completion of these developments, our portfolio will consist of nearly 1,000 megawatts. up approximately 20% from June of 2020. Turning to slide 14. In May, we executed our inaugural green bond offering, raising 500 million euros through the issuance of a seven-year senior note bearing a coupon of 1.125%. The net proceeds were used to repay Euro-denominated borrowings under our revolving credit facility and for general corporate purposes, including pre-funding additional Euro-denominated development spend. We intend to allocate an amount equal to these proceeds to fund existing or future green assets or projects. This transaction further smoothed out and extended our debt maturity schedule and increased our percentage of fixed-rate debt while decreasing our weighted average interest rate. Our percentage of fixed rate debt, which was 86% at the end of the quarter, is in line with that of other investment-grade REITs and significantly mitigate our exposure to rising interest rates. As slide 15 shows, we continue to maintain a strong balance sheet with liquidity as of the end of the quarter totaling $2.28 billion. During the quarter, we sold approximately 3 million shares on a forward basis under our ATM equity program, which will result in net proceeds of approximately $232 million upon settlement by June 2022. Combined with forward sales agreements entered into the second half of last year, we have approximately $519 million in available forward equity. Also, during the quarter, we settled a forward sale agreement entered into last year, resulting in net proceeds of approximately $95 million, which were used to repay a portion of amounts outstanding under our revolving credit facility and for general corporate purposes. We are announcing a 2% increase in the third quarter dividend to $0.52 per share, up a penny from the second quarter dividend. This represents an annualized yield of nearly 3% based on our current share price. While paying an attractive dividend, we continue to maintain one of the lowest payout ratios among REITs. in order to retain internally generated cash flow to reinvest in the business. Turning to slide 16, our backlog at the end of the quarter totaled $129 million in annualized GAAP revenue, up from $113 million as of the end of the first quarter. Approximately $76 million is expected to commence in the second half of this year, resulting in a significant contribution to growth next year. Of the remaining $53 million, approximately $26 million is expected to commence next year, heavily weighted towards the second half of the year. Moving to slide 17. we are revising our 2021 guidance ranges. We are increasing the lower end of our guidance range for base revenue by $10 million, resulting in a $5 million increase in the midpoint. This is primarily driven by a more favorable full-year churn outlook, including the timing impact I mentioned earlier. Additionally, We're increasing both the lower and upper end of our guidance range for metered power reimbursements by $10 million as a result of higher usage across our market. We are increasing the lower end of our adjusted EBITDA guidance range by $5 million, resulting in a $2.5 million increase at midpoint. This is driven by the increase in base revenue. partially offset by slightly higher anticipated property operating expenses, primarily facility costs in Europe. We are decreasing both the lower and upper end of our development CapEx guidance range by $50 million. This is driven by timing, with some spend that was expected to occur later this year now expected to occur early next year. Finally, we are increasing both the lower and upper end of our normalized FFO per share guidance range by 5 cents, with the midpoint also increasing by 5 cents. The increase in the midpoint is primarily driven by the increase in the adjusted EBITDA guidance midpoint and the shift in the expected timing of funding needs. In closing, we are pleased with the company's performance through the first half of the year, and the team continues to work hard to put us in the best position possible to take full advantage of opportunities and continue creating value for the shareholders. We appreciate you participating in our call, and we are now happy to take questions. Given the number of people in the queue, we kindly request that each person ask one question so that we can stay on schedule and conclude the call on time. Thank you. And operator, please open the line.

We will now begin the question and answer session. To ask a question, you may press star then one on your touchtone phone. If you're using a speakerphone, please pick up your handset before pressing the keys. To withdraw your question, please press star then two. At this time, we will pause momentarily to assemble our roster. Our first question today will come from John Atkin with RBC Capital Markets. Please go ahead.

Thanks. So, Dave, I was interested in your prepared remarks up front explaining Bruce's departure, and you gave some reasons why what it's not attributable to, but if you could maybe clarify a little bit why the transition now, who you're looking for, what types of qualifications as you conducted new search, And would this not also be an opportunity to entertain strategic options, given that you were the CEO when the company was sold to Cincinnati Bell back in the day? Thanks.

Thanks, John. Good to hear from you. You know, look, I can't really talk about matters of the board, but what I can tell you is that the board is prepared to kick off a search to find the highest qualified person to run the business. We're committed to the strategy of the company. We're committed to the team. We anticipate no future changes, and we're excited to kick off this search.

So talk about who you might be looking for and then the question that I had about maybe strategic options given the hiatus that we now have at the CEO level.

As soon as we kick off the search, we'll have a group to identify and map out exactly the qualifications, the background. As we have not begun this exercise yet, I really can't comment on it. But, you know, it's an exercise that we look forward to. We haven't embarked upon it. But, you know, as far as strategic, you know, the company is committed, the board is committed to the strategy of the company. We support the team, we're excited about the industry, we think the opportunity is as good as it's ever been, and we're committed to the strategy.

And then secondly, in terms of asset dispositions, any kind of updated thoughts as to the types of interest there may be for some of the legacy assets that might be disposed of over the multi-year timeframe that you talked about at the analyst day? And with respect to Europe, Are we done for now in terms of new market entry, or are there other markets that you think are interesting and opportunistic to expand into? Thanks.

I'd like for Catherine to comment on the first portion of it.

Yeah. Good morning, John. So, on the recycling, as you recall, we committed at our investor day to the program of recycling one to two billion over the next three to four years. And as we execute on this program, we will let you know once we complete on that. Right now, we have nothing to report on this other than we are committed to our recycling program. And as far as Europe, the entry to Madrid is a really strategic point for us. We believe it's a great market. And we're open to new market entry, collaborating with our customers. as and when it makes sense and it strategically fits within our portfolio. We do have expansion opportunities in our current footprint, so that's also our first priority.

Thank you.

Our next question will come from Ari Klein with BMO Capital Markets. Please go ahead.

Thank you. Maybe just following up on the change, Bruce didn't have a data center tech background. Is that something, as you search for the next CEO, you would value a little bit more highly than maybe previously?

Thanks, Ari. We're going to go through a process with the search firm, and we're going to really get granular on how we should define requirements. Until we do that, I really don't want to comment because I don't want to mislead. We will go through a very thorough process to define and look deeply at that.

Got it. And then maybe just on the releasing spread headwinds or expectations that you outlined at the investor day, could you provide some more insights on what markets you're anticipating the most significant headwinds there?

So, Ariel, let me take that. So the Basically, what we communicated at the Investor Day in terms of our outlook on like-for-like renewals in the future depends on where our renewals happen. So it's more of a profile of the leases that we've entered in the past that come up for renewals. Now, renewals are very complex negotiations, as you know. and they take time, and they rotate and change. So it happens across all the markets and across our profile of the leases. So there's not any particular market that I would highlight.

Okay. Thank you.

Our next question will come from Richard Cho with J.P. Morgan. Please go ahead.

I wanted to follow up on the churn that was pushed out. Was this something that we should expect in the third quarter? Could it be delayed further or maybe even avoided? Thank you.

Hi, Richard. Yeah, I mean, obviously, it's in our best interest to work with our customers and avoid churn to the extent possible. As you know, the customers are going through their IT strategies and hybrid strategies and we'll collaborate with them. And as I just mentioned a few minutes earlier, it's very complex and it takes time to collaborate and negotiate renewals with the customers, and we work on it. And as those decisions get pushed out in the future, they're delayed. At some point, we do like to come to resolutions on those, and when they happen, we'll let you know.

Great. Thank you.

Our next question today will come from Simon Flannery with Morgan Stanley. Please go ahead.

Great. Thank you very much. David, I wonder if you could just talk a little bit about what are the things you're going to be really focused on in the next few months as we go through the search process? What are your kind of top three priorities?

Great. Thanks, Simon. Good to hear from you. You know, it's a great question, and my focus is going to be on meeting with customers investors and employees. You know, I've been involved in the business for 20 years. I feel like I really have a great grasp of what's going on in the industry and in the business. And the more time I can spend with our customers and investors and, of course, the team, the better. And that's where my priorities will be focused.

Great. And any comments on the pipeline, the overall demand environment, good leasing this quarter?

Demand is strong, and we're really excited. We've got a record backlog. We feel real good about the demands.

Thank you.

Next question will come from Eric Ramison with Stifel. Please go ahead.

Yeah, thanks for taking the question. Maybe just to clarify or to follow up on the CEO search, what's sort of the timing that you're looking for in terms of identifying a new CEO candidate? I realize it's still early days. And then, you know, does this include both internal candidates as well as external? And then maybe my question is, in addition, you know, given there appears to be a lot of momentum that's built up through the first half of this year, you know, it's evident in the results and the raised outlook for the year, what are the main priorities for the team as you sort of go into the second half of the year and sort of what's driving that optimism for improving fundamentals?

Thanks, Eric. You know, look, the timeline is, it's hard to tell these things. I mean, we're going to have, you know, get together and pick a search firm, you know, shortly. And then once we've gone through the process with them, we can determine how long we think it will be. It's just hard to guess. As far as internal and external, we haven't had that conversation. There may be internal candidates. There may be external. It's just too early to tell. This is very fresh. The second half of the year, You know, we're committed to the strategy. We feel strong. Demand is strong. The backlog is fantastic. You know, we're being very, very focused on just executing on the strategy as we laid out, and the team is really enthusiastic. So, you know, I don't have any different guidance than we've already given.

Okay, thank you.

Our next question will come from Frank Muthan with Raymond James. Please go ahead.

All right, great. Thank you. So just wanted to follow up a little bit on, you know, we just had the analyst day. Are there any aspects of the strategy that were laid out that are, you know, no longer viable or you won't really be pursuing? What's sort of the takeaway from there? Thanks.

Thanks, Frank. No, you know, we're really excited about this. about the strategy. I actually watched the entire investor day start to finish twice. The board is committed to the strategy. The team is committed to the strategy. There are absolutely no changes to report.

Okay, great. Just a quick follow-up. Are there any other key personnel that you need to hire or put in place to kind of achieve the strategy? Where are you on sort of the senior team?

And we feel great about the senior team. We have no open slots that we're looking for.

All right, great. Thank you.

Our next question will come from Colby Simonsale with Cowan. Please go ahead.

Great. Thank you. I apologize for beating a dead horse here, but I'm going to do it anyways. I guess... What value are you gaining being so closeted as to the why you're making this CEO change? I mean, Dave, to your own point, it's fresh. I mean, it seems like you guys just did this. Your stock's off 5% since this call started based on, I think, a frustration, which has been part of the theme of this company over the last year in terms of just not really sharing much information. You've gone through four CEOs in the last 18 months. Don't you guys think that investors deserve to understand a little bit more about what's going on with the company?

You know, Colby, I totally respect the frustration. I understand the question. You know, there's just certain things that are private to the board, and I can't comment on. And, you know, I'm really, you know, I look over the last, you know, you can look at the last 10 years, 15 years of the company, and while there's been changes to the company, the momentum continues. The team is strong. You know, the secular demand's of the industry are great. The team really has been able to translate that into successful growth, profitable growth. And I get it. I mean, you know, look, this team is, you know, we call it high, wide, and deep. You know, we get very, very, you know, we're not dependent on any one individual. And I understand the frustration. And I feel the same if I were not getting an answer. But there's matters that are private that I just can't answer. And so we focus on the things we can control. And, you know, there's just such a tremendous momentum, and we just had such a great quarter that we're just focused on execution.

Well, hopefully there will be a point that comes soon when you guys can share more information on really what did happen, what is going on, because I do think that that's a big problem for you guys right now. And then I guess just secondly, as I shift over, the 18% to 22% cash renewal spread that you disclosed at the annual stay, Just want to get a clarification. Is that simply where your current rates are relative to market? Or is that genuinely what you think is going to happen in terms of where you're actually going to take your rates over that time period? Thank you.

Yeah, Colby. This is Catherine. Let me take that one. So our outlook on like-for-like renewals that we communicated in the investor day is basically a comparison to the rates or leases that will come up for renewal or are scheduled to come up based on the lease expiration dates that we know now in the next three years compared to the market rates of today. It does not necessarily imply that we would get to that point. We'll try to mitigate that risk as we renew leases and work with the customers.

Great. Thank you.

Our next question will come from David Guarino with Green Street Advises. Please go ahead.

David Guarino Thanks, Catherine. Maybe this one's for you. I appreciate the added disclosure on the gap in cash renewal rents. Maybe first, is this going to be a metric that you'll provide going forward? And then historically, what percentage of your leases renewing are actually considered like-for-like? I know some of your peers blend together the new and renewal leases, so it's somewhat difficult to compare those metrics.

Catherine Lee Yeah. Hi, Dave. Let me take this first of all is like for like in the last two quarters have been a very small portion of our renewals. It's hard to predict what in the future, what portion of our renewals would be exactly like for like. It is very complex, and as customers go through their IT hybrid strategies, it's very hard to determine what exactly would be like for like. As far as historical, I'll probably get back to you at some point. I don't have those numbers in front of me to compare that. But, yes, we will continue to disclose this metric and talk about it.

Okay. And then maybe I want to ask also on the strategy of issuing equity. And the reason I ask that is, well, I know that's part of the company's strategy to issue equity to fund its development projects. when you did it in Q2, the share price you achieved was pretty attractive. So was that just a temporary opportunity you guys saw and said, hey, let's go raise capital at this price, or was that planned and it just happened to be really well-timed?

So the way we use Forward ATM program is we really like that program because it gives us flexibility and it gives us opportunity to raise funds when it's – when its market is favorable, but it also gives us an opportunity to take those funds down to fund our development pipeline in the next nine to 12 months. So that's the flexibility that we like about this program. The amount of forward equity that we raised in the second quarter of this year was consistent with our forecast and our plans and expectations to fund our development pipeline. We were fortunate and opportunistic on the market conditions. I do agree with you. And then we had to take down some of our commitments from prior year as well. So it is the flexibility of this program that is attractive to us.

All right. Thanks for that.

Our next question will come from Matt Nickman with Deutsche Bank. Please go ahead.

Hey, thanks for taking the question. My question is on U.S. hyperscale. If I sort of look at the $42 million in leasing and I peel away enterprise and I peel away Europe hyperscale, you know, it seems like U.S. hyperscale leasing is only about $3 million in the quarter. And I know this can be really lumpy, but I'm just wondering, is there any changes you saw on the competitive front, intra-quarter, anything change in terms of market dynamics or demand that you can comment on? Thanks.

Matt, so let me just first of all remind you that we have talked about how lumpy hyperscale leasing is and how we like the geographical diversification. So in the first quarter, we had a record U.S. leasing. In the second quarter, we have strong Europe leasing. So those transactions are so large and deployments are large and they take time to collaborate with the customers and sign those leases. So, as far as the overall broad market, it's not any indication of what type of leasing we'll have. We don't talk about future leasing. We talk about the leases that we have signed. But I'll let Dave can talk about the market in the broader sense.

Yeah, the market's strong. Demand is strong. And, you know, while we've been having such a huge focus on Europe, we're seeing great demand in the U.S. right now as well. And so, You know, the business is always, you know, kind of a local business, right? And so we feel strong about where we have capacity, and we're not seeing anything that would give us concern.

Just one quick follow-up, and I believe I know the answer to this, but I want to make sure I get this right, too. At the investor day, there was a target laid out for mid-single-digit and FFO for share growth the next couple of years. Does that still hold as well with Bruce leaving?

Yes. As Dave said earlier, there is no change to strategy. The strategy that was laid out on Investor Day is what we are focused on execution.

Perfect. Thank you. Our next question will come from Brendan Lynch with Parkways. Please go ahead.

Great. Thanks for taking my question. I wanted to just dig in a little bit on the capital recycling program. If you can give us some color on protecting the customer relationships that you have, you know, increasingly you do have a component of interconnection and your customers are buying into a platform. So it's not necessarily just the one asset that they're in. I'm just kind of curious how you're thinking about protecting those relationships as you sell some of those assets.

Thanks, Brendan. Let me take this one just because the capital recycling program we just announced last month, and we set up a target of $1 billion to $2 billion over three years or so. We'll be very disciplined and obviously we take our customer relationship very seriously and it's a big and important asset for us. So capital recycling program is focused more on our non-core assets and optimizing the portfolio to the extent that makes sense and our portfolio fits our customer needs is how we would approach that program. Steve?

We're very sensitive to this topic, and I'm glad you brought it up. This is a platform, and, you know, our customers are traditionally deployed in several places. So we don't take it lightly. We look at all aspects, but we are committed to the strategy, and we are committed to the market. So, you know, at the end of the day, you know, we balance all of those aspects, and the customer always comes first.

Great. Thank you for taking my question.

Our next question will come from Sammy Badry with Credit Suisse. Please go ahead.

Hi, thank you for the question. I want to look at just the P&L and look at your general administrative expenses that actually dropped off quite a bit sequentially to Q21. And what I'm really doing here is I'm triangulating with what you guys actually reported on your leasing with 33% of annualized gap revenue coming from enterprises. So maybe just to think about what this business needs to spend on general administrative and sales and marketing, and to think about the balance between hyperscale and enterprise, you know, how much are you guys going to have to spend in OpEx to sustain signings and business? And kind of like my bigger question here is when we move from 2021 and into the out years and considering your strategy, what is the adjusted EBITDA margin profile we're solving for here?

Hi, Sami. So, first of all, and I recognize that we haven't filed our queue yet, but let me just tell you there was a one-time item in SG&A this quarter. It was a settlement on an insurance related to a lawsuit that has been outstanding for a few years. So, absent of that, our SG&A has been pretty consistent and steady. As you recall, in the investor day, we pointed out to our margin expansion that we expect to reach, we expect to improve X-metered power margin by 300 points by the 2025 time horizon. So that's our goal. And we continue serving our mix of our customers, both enterprise and hyperscale. So I'm not sure if... Exactly one size fits all, but we do have inside Salesforce that works with our customers, and it's our primary direct sales channel.

Yeah. Hey, Sammy, it's John. So I just want to add something to that. Like, when we think about enterprise and hyperscale, like, these are still going to large-scale campuses, right? And the operational, the OpEx efficiency you get translates to both sets of customers, right? It doesn't look like, oh, this enterprise customer costs us more to operate than, you know, this hyperscale customer. I think it's just important to keep in mind these customers are going into the same assets. While their deals may not be as large, they're getting the same operational, you know, level of service from us.

And, Sammy, I'd like to add a little bit to that too because I think there's, you know, as we've seen the business evolve over time, You know, the way I look at this is similar to John, but I'd state it a little differently. You know, everything's a cloud these days, right? So you've got public clouds and private clouds. The deployments on our side are the same. The OPEX efficiency is the same. You know, it doesn't – it's just a private cloud is, you know, we call it enterprise. They're using it internally. The public cloud is reselling it as a service. But to us, the provider, you know, we do the same thing. So, you know, I think it's important to understand that the scale and the efficiencies we get due to scale – are great, it doesn't matter to us whether it's, you know, a public cloud deployment or private cloud deployment.

Got it. Thank you. And just a follow up request here. And I'm doing this mainly on behalf of a lot of the industry experts and, and just relationships are built in the data center industry. And, you know, over the last couple years, and then covering the sector, but what kind of executives are you looking for to fill the new CEO role? And, you know, you don't need to give a specifics here on person or profile, but maybe just regional focus, or hyperscale versus enterprise, you know, kind of just ironing out a little bit more focus on what you guys are looking for, for the next successor to come in from a CEO perspective.

So Sammy, I, you know, I think I was asked the same question earlier, and we haven't defined it, we're picking up, this is really fresh, we're picking a firm, we're going to go through a really detailed process to define that. And without sounding coy, I mean, we need the right person who's the best fit for the company. And that's both a cultural fit, it's a knowledgeable fit, enthusiasm fit, I mean, all of those different things. But until we actually embark upon the process, you know, I think I'd be front-running by trying to guess and lay some qualifications out.

Got it. Thank you.

Our next question will come from Jordan Sadler with KeyBank. Please go ahead.

Thank you. And Dave, good to be with you. And thanks for that last response. I think I get it on the new search. But I think in your commentary, you've mentioned that the board is committed to the strategy and to the opportunity, which really seems like the board is committed to staying the course, essentially, after hiring a new president CEO. Does this mean that the company is not for sale?

You know, the board is committed to the strategy. We're committed to the team. You know, that hasn't changed, and it's not going to change.

Okay. So has the board discussed hiring bankers to sell the company?

You know, we don't comment on matters of the board.

Okay. And then, you know, you've been involved with the company for, you know, 20 plus years or so. You stepped away almost a decade ago. How actively involved have you been in the operations of the business as a board member, if at all? And, you know, for instance, do you still have relationships with the customers?

You know, it's a small world, right? And being someone who was on the inside, you know, you kind of always stay on the inside. I mean, I've known... A lot of the customers, I know a lot of people on this call. I know a lot of the employees, and I've maintained relationships with all of them. I wouldn't say I've been involved in the operations of the business. I'd say I've been at board oversight. I think I did a pretty good job of going from being a CEO to being a board member, which is not easy. But I've maintained good relationships with a lot of customers and a lot of employees. And while I don't know a lot of the investors because I haven't been in this seat, I'm excited to meet them.

Along those lines, in terms of the search, will you toss your hat in the ring for the potential full-time role?

Yeah, it's too fresh and early for me to comment on that. You know, I think I need to kind of be around for a little while before I consider that.

Okay. Thanks for your patience.

Thank you, Jordan.

Our next question will come from Michael Billerman with Citi. Please go ahead.

Yeah, it's Michael Billerman. So, Dave, I was just wondering if you go back to when you were sitting in the boardroom in the search last year. Obviously, you had Tesh in the seat who had been at the company and ran a pretty exhaustive search with the search firm. What were the qualifications that you looked for then that weren't met today that made you lead to the change? So what was the thing that you thought you were going to get? You obviously made a very large financial commitment to Bruce. You're now making a large financial exit and now have to go through it again, which is a lot of shareholder capital. So can you at least dive into a little bit about you had prepared a fulsome search last year about trying to find the best individual to lead the company forward. A year later, you've made the decision to go a different way. I think investors sort of should be able to get a little bit of color, especially because it's their money, and as a board member, you work for shareholders, to give us a little bit more color about sort of the shift one year later.

Michael, thank you, and it's a fair question, and I appreciate it. You know, obviously, I've said it a few times, there are certain matters of the board I can't comment on, but what I will tell you is that we did do an extensive search last year, and Tesh was considered for the job. And the board made the best decision they thought they could at the time. And, you know, the changes that we just experienced this week have nothing to do with the business, its operations, you know, the financial reporting, the internal controls or procedures, or how, you know, how Bruce managed the business. And so as we go forward, you know, we're going to go down a similar path, and we're just hoping for a different outcome.

So just personality and culture at the end of the day then?

You know, I would love to be able to comment on matters of the board, but, you know, I'm just prohibited from doing so. And so I, you know, while it's a fair question, we just have certain, you know, certain things that are private for the board.

And I guess as you're thinking about the board, just following on Jordan's question, You know, do you feel like the board needs more strategic advice as you go through the same process again with a search firm to find a CEO? Does it make sense to bring in sort of advisors to evaluate everything? Or is the board committed now just, you know, stay the course and be a public company for a long time?

You know, I don't, can you maybe articulate the question? I don't understand exactly what you're asking.

Well, I'm trying to understand that, you know, obviously the board made the decision that the company to grow needs a different leader, right? Needs a different CEO. Maybe you, maybe someone else, maybe someone with data center experience, maybe it's a different industry. The board has obviously come to the conclusion that Bruce was not the individual that you would see managing this enterprise going forward. As part of that, shouldn't the board also think about whether the company, maybe it's not the CEO that's the problem, right? Maybe it's something else deeper that requires outside counsel to come in.

We use advisors when the board sees fit. We use all kinds of advisors on a regular basis, and we'll continue to do so.

And just lastly, have you summed up the total amount of shareholder capital that's been spent between Gary, Tesh, Bruce? I mean, I think it's almost $50 million in totality when you sum everything up with all the payments and the stock grants and the terms.

You know, I have not, you know, spent time. Catherine, you know, I don't know if you have a comment on that.

Yeah, I mean, Michael, we have public disclosures, and we have filings, and the numbers are out there.

Yeah, I'm just trying to – I mean, it's a pretty big number between all three, and so I'm just trying to get an understanding of the board how they think about capital in these things. These are not small amounts of money that's being tossed around.

Right. So we're focused on running the business, and the Board made the decision that they made the decision, and we're here to run the business. So that's what we're focused on.

Okay. Thank you.

Our next question will come from Jeff Cavall with Wolf Research. Please go ahead.

Yes. Thanks very much. And let me change gears a little bit. One of the things that we've heard a little bit about in the industry outside, and actually Equinix brought it up last night, is there's a bit of an increased propensity for the largest web scalers to try and self-build where they can. I'm wondering to what extent that is a dynamic that you are also seeing, and what are the barriers that they face in that process?

Hey Jeff, it's John. Um, thank you. So, um, listen, the, the hyperscale customers have been building their own data centers for decades. Um, and we've seen that split, you know, 50, 50, 60, 40, depending on the customer, depending on the market, um, that exists out there. Um, we don't see it as a real headwind. They, they look at us as partners in this space, right? They need to deploy cloud services. Sometimes they can build it themselves. Sometimes they, they lease it. And, uh, Nothing new there.

It's swinging more towards self-build at the moment.

I mean, like I said, Jeff, I think it's completely market dependent, right? I mean, if you look at Europe, there's probably very little self-build. If you look at some markets in the U.S., depending on their land position versus the provider's land position, maybe it swings the other way a little bit. But it swung the other way, like I said, for years.

Okay. Why don't I follow up on the record backlog? Obviously, last few quarters, great leasing activity, record backlog. The sort of organic leasing revenue growth is sort of yet to see that, at least in this guidance. And I'm wondering when we should see that translate through to – to the leasing performance?

We've laid out, as Michael, Jeff, you know, we've provided a commencement schedule, an estimated commencement schedule. Catherine provided more color on that schedule, so that lays out exactly, as we sit here today, what we think the timing is going to be on that backlog.

Yeah, and remember, 86% of it's pre-leased of the development pipeline, so that's in the backlog.

Yes, let me broaden that a little bit because, you know, leasing is quite variable, and so I want to make sure that the leasing strength in the last couple quarters isn't like an uptick, but it'll continue, and therefore there'll be more leasing strength to support the revenue growth for 2022 and beyond. This isn't just a three-quarter surge post the pricing action.

So we don't talk about future leasing. We do tell you that the backlog and the profile of backlog will drive the revenue growth. And as Dave pointed out, the market demand is strong, and we continue to look for opportunities to capitalize on it. Respectfully, if we can move to the next few questions, we have only a couple minutes.

Thank you. Our next question will come from Eric Lucco with Wells Fargo. Please go ahead.

Thanks for taking the question. So looking at your portfolio today, your development pipelines almost fully leased, I think 86%. So in some of your best markets in Europe, Northern Virginia, Phoenix are 90 to 100%. So, you know, kind of surprised that you would lower your CapEx guidance. And I appreciate that there was some spend that got pushed out. But are you running into any supply constraints in the second half of the year that might, you know, impede your ability to continue leasing momentum? Or are there some projects going on, you know, in the background that haven't been disclosed on the development side that could provide some opportunity.

Hi, Eric. So, yeah, I mean, we lowered the CapEx guideline not because of the projects being canceled or anything, but the timing of that capital expenditures is getting pushed out, some primarily due to permitting. Mostly, for example, Santa Clara is still in the process of permitting. We also had delays in permitting in Frankfort. We do not anticipate. We have experienced some issues with supply chains on the minor level, but let John talk about that.

Yeah, Eric, on the supply chain side, I mean, to the permitting stuff, too, that Catherine mentioned, that's all it is. Those projects are teed up, contractors, everything, so we're just waiting on permits. But on the supply chain side, listen, we have seen some minor impacts to some equipment, and our supply chain has been robust enough to deal with that, but We're constantly watching it, but there's a global issue, and the team's all over it.

Okay, great. And just one quick follow-up. On the enterprise leasing side, I thought you had signaled maybe it would be flatter or a little weaker, but it came in kind of ahead of the $9 million to $12 million you typically target per quarter. So maybe you could provide a little color. Were there some larger enterprise deals that came in this quarter, and maybe what does the pipeline look like going forward?

Yeah, so enterprise business, even though it's stadier than obviously and less lumpy than hyperscale, but generally you still have deals that happen. They're not necessarily quarter to quarter. So if you remember, our first quarter on enterprise wasn't as strong, so this was a little bit stronger. It's all about timing, really, at the end of the day when we sign the leases.

Okay, thank you.

Our last question will come from Michael Funk with Bank of America. Please go ahead.

Yeah, thank you for putting me in, guys. One few, if I could, Dave, and I appreciate you don't want to comment on internal board discussions or deliberations. So more your opinion, Dave. Clearly the public markets are forcing suboptimal levels of leverage on data center companies, even recycling assets, which is arguably a low-cost source of capital, seems to be punished in the short term due to the dilution. So, you know, what is the advantage at this point to being a public company versus being private for Cyrus One?

You know, as a public investment-grade company, I'll tell you our customers really love that we've got access to capital. You know, our customers would always rather do business with us if we have capacity, and I think part of that is they know that we have access to capital. So the customers really enjoy it.

It's a concern that's being private that you wouldn't have access to enough capital to develop. Is that the concern that the credit markets or even partners or owners wouldn't have access to the same amount of capital?

Michael, I don't think we should comment on private versus public. We are a public company, and we enjoy certain privileges as a public company, but we also, in being more transparent to our customers, and the customers appreciate that, and we take full advantage of where we are. And we do have access to capital through public markets, but that's where we are. We're creating value for our shareholders as a public company.

Sure. I appreciate that, and thank you for the time.

Thank you.

Hey, take care.

Thank you all. I look forward to meeting some of you as I get out and about, and I appreciate your time today.

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