Image Shown: Shares of CyrusOne, an idea included in our High Yield Dividend Newsletter portfolio, are on a modest upward climb of late. The data center real estate investment trust (‘REIT’) is reportedly considering putting itself up for sale, though we like the REIT’s income generation upside regardless of whether a sale does materialize as its outlook continues to improve after posting stellar performance during the first half of 2021.
By Callum Turcan
Reportedly, CyrusOne (CONE) is actively exploring a potential sale according to Reuters. We include shares of CONE as an idea in the High Yield Dividend Newsletter portfolio (more on that here). The data center real estate investment trust (‘REIT’) has experienced significant turnover in its top ranks over the past couple of years which we will cover briefly, as that likely set the stage for the potential sale.
Should CyrusOne decide not to sell itself, we would still be fans of its business model, growth runway, improving outlook, and income generation potential. As we covered in our August 2021 article High Yielding Idea CyrusOne Beats Estimates and Raises Guidance (link here), the data center REIT recently boosted its full-year guidance for 2021 on the back of its strong performance during the first half of this year. In conjunction with its second quarter earnings report, CyrusOne raised its quarterly dividend by a penny up to $0.52 per share or $2.08 per share on an annualized basis. Shares of CONE yield ~2.8% as of this writing.
Why an Asset Sale May Be in the Works
Rumors regarding whether CyrusOne would put itself up for sale have circulated in the past. Back in October 2019, former CEO Gary Wojtaszek noted during the REIT’s third quarter of 2019 earnings call that (emphasis added):
“As you may be aware, several media outlets have reported, and some of you have speculated that we have, we’re 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.”
This is important to note because Mr. Wojtaszek resigned from the CEO role in February 2020, with Tesh Durvasula taking over as interim CEO (please note that Mr. Durvasula was set to exit CyrusOne before this event took place in the wake of widespread layoffs at CyrusOne) until Bruce Duncan was tapped for the top spot in June 2020. However, in July 2021, CyrusOne’s board decided “to separate” from Mr. Duncan, replacing him with the REIT’s co-founder David Ferdman who is currently CyrusOne’s interim CEO and President.
In early 2020, CyrusOne announced it was laying off roughly 12% of its workforce due to changing market dynamics in the data center market. Within that news announcement, CyrusOne noted that Mr. Durvasula (then President of CyrusOne’s European operations) would leave the company in March 2020 as part of the REIT’s restructuring process (though Mr. Durvasula ended up staying a few months longer by becoming the REIT’s interim CEO).
The reasoning behind the layoffs and broader corporate restructuring largely had to deal with demand from “hyperscale” data center customers, namely large cap tech companies such as Amazon Inc (AMZN) and Microsoft Corporation (MSFT) with enormous cloud computing operations, slowing down (at the time) in regions where CyrusOne operated.
However, demand for data centers is once again surging as the coronavirus (‘COVID-19’) pandemic accelerated longstanding secular trends such as the proliferation of e-commerce, cloud computing, collaboration (such as teleconference activities), and productivity (with an eye towards meeting the needs of remote workforces) operations–activities that require data centers and related offerings to function. Big data analytics and AI activities, along with the nascent autonomous driving industry, represent other key sources of data demand going forward. That, in turn, drives up the need for additional data center facilities, which is good news for CyrusOne.
QTS Realty Trust, another data center REIT, agreed to be sold to funds controlled by Blackstone Inc (BX) through an all-cash transaction valued at ~$10 billion when including debt in June 2021. That offer involved a nice premium (roughly 21%) to QTS Realty Trust’s stock price before the news broke. Should CyrusOne pursue an outright sale, infrastructure funds and private equity names may be quite interested in its assets. CyrusOne had ~55 data center facilities worldwide, including one recovery center, at the end of June 2021 across 16 markets including 11 US cities, London (UK), Dublin (Ireland), Singapore (Singapore), Frankfurt (Germany), and Amsterdam (Netherlands).
Digital Realty Trust Inc (DLR), another data center REIT that we are big fans of (shares of DLR are included as an idea in both our Dividend Growth Newsletter portfolio and High Yield Dividend Newsletter portfolio), sold a portfolio of 11 data centers in Europe to a CapitaLand sponsored REIT for ~USD$0.7 billion in cash in March 2021. For reference, CapitaLand Group is headquartered in Singapore and focuses on real estate properties. There clearly is ample demand out there for data center properties, and the industry is supported by powerful secular growth tailwinds which underpins its promising long-term growth outlook. CyrusOne’s asset base could be attractive to a larger company with sizable data center properties, infrastructure funds, or private equity firms.
Concluding Thoughts
We are keeping a close eye on these developments and related headlines, though we stress that nothing is for certain at this point. A potential sale of CyrusOne remains just rumor and speculation, though after doing some digging, there are several viable reasons to believe an outright sale could materialize.
Recent capital market activities indicates that CyrusOne has been able to tap debt and equity markets at attractive rates in recent quarters, and we expect that will continue to be the case going forward. That, in turn, will enable CyrusOne to fund its growth ambitions while making good on its payout obligations. CyrusOne’s cash flow growth outlook is steadily improving, and its development pipeline is robust, which will enable the REIT to capitalize on rising data center demand seen across the world. We continue to like CyrusOne as an idea in the High Yield Dividend Newsletter portfolio.
Members interested in reading more about CyrusOne are strongly encouraged to check out our August 2021 article covering the name.
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Real Estate Investment Trust Industry – CONE, DLR, FRT, O, REG, SPG, WPC, PEAK, HR, LTC, OHI, UHT, VTR, WELL, PSA, EQIX, CUBE, EXR, IRM
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Callum Turcan does not own shares in any of the securities mentioned above. CubeSmart (CUBE), CyrusOne Inc (CONE), Digital Realty Trust Inc (DLR), Public Storage (PSA), and Vanguard Real Estate Index Fund ETF (VNQ) are all included in Valuentum’s simulated High Yield Dividend Newsletter portfolio. Digital Realty Trust Inc and Realty Income Corporation (O) are both included in Valuentum’s simulated Dividend Growth Newsletter portfolio. Microsoft Corporation (MSFT) is included in both Valuentum’s simulated Best Ideas Newsletter portfolio and simulated Dividend Growth Newsletter portfolio. Some of the other companies written about in this article may be included in Valuentum’s simulated newsletter portfolios. Contact Valuentum for more information about its editorial policies.