CyrusOne (CONE) is a real estate investment trust that operates 50 computer data centers in the U.S. and Europe, notes Douglas Gerlach, editor of Investor Advisory Service — and a participant in The Interactive MoneyShow Virtual Expo from May 11-13. Register for free here.

CyrusOne is one of the ten largest data center operators worldwide, though revenues only topped $1 billion for the first time in fiscal 2020. Its mission critical facilities ensure the continued operation of IT infrastructure for more than 1,000 customers, including 200 Fortune 1000 companies.

The REIT primarily offer large spaces on a wholesale basis with longer-term leases, and has both multi-tenant and single-tenant facilities.  After cloud providers like Microsoft (MSFT), companies in the financial services and energy industries currently contribute the biggest proportions of CyrusOne's sales.

Data centers like those operated by CyrusOne serve the growing demand for secure and fast cloud data storage and application delivery. The global pandemic increased the need for CyrusOne’s services, but this demand is unlikely to let up anytime soon.

Since 2011, CyrusOne revenues have grown at an annualized 23.2% a year. FFO/S showed unspectacular results earlier in the decade, but since 2017 have grown around 8.1% a year.

In fiscal 2020, revenues were constrained by the pandemic, especially in the company’s European operations, with tasks like getting required building permits taking much longer to accomplish. Revenues grew just 5.3% in the year as a result.

CyrusOne management addressed the situation in fiscal 2020 by focusing on improvements to boost FFO. As a result, FFO/S grew 20.0% year-over-year. Another highlight for 2020 was the signing of $156.8 million in additional annualized revenue, the highest total in the company's history, up 56% from its 2019. Its Q4 was one of the company’s biggest leasing quarters, as well.

At year-end, its client base had an average weighted lease remaining of 56 months, and the average term of leases signed during 2020 on a colocation square-foot weighted average basis was 8.2 years.

For 2021, management says that holdover effects from the COVID-19 pandemic will slow deployments and extend the book-to-bill cycle.

These should prove temporary, and CyrusOne is moving ahead with expansion in the U.S. and Europe, adding new facilities in Dublin and Paris and expanding capacity in Frankfurt and London.

Douglas Gerlach

Guidance for fiscal 2021 is for revenue growth of 8% at the midpoint of the provided range, and FFO/S of around $3.95.

We see the weaker outlook for 2021 as creating an opportunity for investors to acquire shares now for long-term positions. The current yield is 2.7%, providing some reward if results take longer to achieve than expected. Our projection for long-term growth is 10% for revenues and 12% for FFO/S.

CyrusOne’s balance sheet is solid. Long term-debt-to-equity is trending down and was 145% at year-end 2020, much below the Specialty REIT industry’s weighted five-year average of 235%.

ROE has softened as the company has added shares to generate additional capital, but its investments in expanding capacity should pay off down the road. Profit margins have also been consistent and healthy.

With dividend payouts averaging 60% of FFO a year, the dividend is very healthy. Dividends have been raised every year since they were first paid in 2013.

From its present price of $74.09, we see CyrusOne as a buy up to $78, based on a high P/FFO ratio of 23.9. On the downside, our potential low price is around $55, representing a 4:1 reward-to-risk ratio and a potential 17.5% annualized return.

As a REIT, we recommend that investment clubs and partnerships avoid holding this security due to accounting complications. However, individuals have no similar issues with owning REITs and can, in fact, benefit greatly from diversifying into the real estate sector.

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