CyrusOne: Successful Public Offering Of This Data Storage REIT

| About: CyrusOne (CONE)

CyrusOne (CONE) made its public debut on Friday, January 18th. Shares of the owner and operator of enterprise, carrier-neutral data center properties ended their first trading day with gains of 11.6% at $21.20 per share. After the first day spike, shares moved in a $21-$23 trading range, currently exchanging hands at $21.58 per share.

The Public Offering

CyrusOne owns 24 data centers, mostly in the Southern States of the US, but it also owns a centre in both the United Kingdom and Singapore. These enterprise facilities have redundant power and communications which are not network specific, allowing customers to establish communication with multiple carriers at once. In total the facilities are comprised out of 1.63 million net rentable square feet footage, powered by 125 megawatts of power. CyrusOne owns 9 buildings and leases the remainder of the buildings.

CyrusOne is a carve-out of Cincinnati Bell which has operated the data based center business for some 10 years. Cincinnati Bell acquired GramTel in 2007 and Cyrus Networks LLC in 2010. All activities were combined into CyrusOne.

CyrusOne sold 16.5 million shares for $19 a piece, thereby raising $313 million in gross proceeds in the offering process. Based on the offer price of $19, the company is valued at $1.18 billion. All shares were offered by the company which will use the net proceeds of the offering in exchange for operating partnership units.

The offering was quite a success. The offer price was set above the preliminary $16-$18 price range set by the firm and its bankers. In total, 26.6% of the total shares outstanding (including partnership units) were offered. At Wednesday's closing price of $21.58, the firm is valued at $1.34 billion.

The major banks that brought the company public were Morgan Stanley (NYSE:MS), Deutsche Bank (NYSE:DB), Bank of America/Merrill Lynch (NYSE:BAC), Barclays (NYSE:BCS) and Citigroup (NYSE:C), among others.


CyrusOne offers its solutions to approximately 500 customers. The customer base is heavily skewed as the top 10 generated 46% of total annualized rent revenues in September of last year.

The company hopes to grow its business by engaging in long term strategic relations with customers by offering flexibility, reliability and security in tailored solutions.

CyrusOne reported annual revenues of $181.7 million for 2011, up 42% on the year before. The company reported a $1.5 million profit for the year, while it lost $1.2 million on a pro-forma basis.

For the first nine months of 2012, CyrusOne generated revenues of $162.8 million, up 21.7% on the year before. The company reported a GAAP loss of $13.4 million for the period, driven by a $13.3 million impairment charge, which compares to a profit of $1.8 million last year. As a result of continued investments in new capacity, the utilization rate dropped from 86% to 78%.

Based on Wednesday's closing price of $21.58, the market values CyrusOne at 7.4 times annual revenues. The company is expected to report a loss for 2012 on continued investments, higher depreciation charges and one-time impairment charges.

Net proceeds from the offering will be roughly $280 million which will be used for future acquisitions and development of real estate and data centers.

Investment Thesis

As noted above, the public offering of CyrusOne has been quite a success as shares were offered above the preliminary price offer range and showed a nice first day jump. At the moment, shares are trading 26.9% above the midpoint of the preliminary offer range.

The sentiment around the offering has been good. The market remains very optimistic about the "big data" theme, as named by IBM (IBM), which even boosts the prospects for specialized REITs of data centers, including CyrusOne.

Investors might be attracted to the company's interesting dividend yield. CyrusOne anticipates to pay out a $0.16 quarterly dividend, for a dividend yield of 3.0%. The annualized payout of $0.64 represents roughly 69% of cash available for distribution. Payouts might increase in 2013 when new leases commence billing during the first half of the year.

I am not surprised with the strong initial performance as the combination of a REIT paying a decent dividend, and the growth story supported by the "big data" theme might attract a lot of investors in today's low interest rate environment. As such the stock offers both the potential for earnings and dividend growth, while paying out substantial dividends to its new owners at the moment.

A drawback is that Cincinnati Bell will continue to own the majority of the shares, which could limit the freedom of CyrusOne given that the company remains the largest customer of the business. A gradual reduction of Cincinnati's stake in the future would be best for all involved.

While I applaud the long term growth story I am hesitant to jump onboard, as shares have seen quite a jump from the preliminary offer range. I remain on the sidelines.

Disclosure: I have no positions in any stocks mentioned, and no plans to initiate any positions within the next 72 hours. I wrote this article myself, and it expresses my own opinions. I am not receiving compensation for it (other than from Seeking Alpha). I have no business relationship with any company whose stock is mentioned in this article.