CYR_2018AnnualReportCover_2018.pdf 1 3/4/19 10:20 AM
2018 ANNUAL REPORT
CyrusOne.com
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, DC 20549
FORM 10-K
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE
ACT OF 1934
For the fiscal year ended December 31, 2018
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934
For the transition period ___________ to ____________
Commission File Number: 001-35789
CyrusOne Inc.
(Exact name of registrant as specified in its charter)
Maryland
(State or other jurisdiction of
incorporation or organization)
46-0691837
(I.R.S. Employer
Identification No.)
2101 Cedar Springs Road, Suite 900, Dallas, TX 75201
(Address of Principal Executive Offices) (Zip Code)
(972) 350-0060
(Registrant’s telephone number, including area code)
Securities registered pursuant to Section 12(b) of the Act:
Title of Each Class
Common Stock, $.01 par value
Name of Each Exchange on Which Registered
NASDAQ
Securities registered pursuant to Section 12 (g) of the Act: None.
Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.
Yes
No
Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.
Yes
No
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities
Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and
(2) has been subject to such filing requirements for the past 90 days.
Yes
No
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant
to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was
required to submit such files).
Yes
No
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§ 229.405 of this chapter) is not
contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated
by reference in Part III of this Form 10-K or any amendment to this Form 10-K.
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting
company or an emerging growth company. See the definitions of “large accelerated filer”, “accelerated filer”, “smaller reporting company”
and "emerging growth company" in Rule 12b-2 of the Exchange Act.
Large accelerated filer
Non-accelerated filer
Accelerated filer
Smaller reporting company
Emerging growth company
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for
complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act.
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act).
Yes
No
The aggregate market value of the voting Common Stock owned by non-affiliates on June 30, 2018, was $5.8 billion, computed by
reference to the closing sale price of the Common Stock on the NASDAQ Global Select Market on such date.
There were 108,257,818 shares of Common Stock outstanding as of February 14, 2019.
Portions of the definitive proxy statement relating to the Company’s 2019 Annual Meeting of Shareholders are incorporated by reference
into Part III of this report to the extent described herein.
EXPLANATORY NOTE
Unless otherwise indicated or unless the context requires otherwise, all references in this report to “we,” “us,” “our,” “our Company”
or “the Company” refer to CyrusOne Inc., a Maryland corporation, together with its consolidated subsidiaries, including CyrusOne
LP, a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references to “our
operating partnership” or “the operating partnership” refer to CyrusOne LP together with its consolidated subsidiaries.
CyrusOne Inc. is a real estate investment trust, or REIT, whose only material asset is its ownership of operating partnership units
of CyrusOne LP. As a result, CyrusOne Inc. does not conduct business itself, other than acting as the sole beneficial owner and
sole trustee of CyrusOne GP (the sole general partner of CyrusOne LP), a Maryland statutory trust, issuing public equity from
time to time and guaranteeing certain debt of CyrusOne LP and certain of its subsidiaries. CyrusOne Inc. itself does not issue any
indebtedness but guarantees the debt of CyrusOne LP and certain of its subsidiaries, as disclosed in this report. CyrusOne LP and
its subsidiaries hold substantially all the assets of the Company. CyrusOne LP conducts the operations of the business, along with
its subsidiaries, and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity
issuances by CyrusOne Inc., which are generally contributed to CyrusOne LP in exchange for operating partnership units, CyrusOne
LP generates the capital required for the Company's business through CyrusOne LP's operations and by CyrusOne LP's incurrence
of indebtedness.
As of December 31, 2018, the total number of outstanding shares of our common stock was approximately 108.3 million. CyrusOne
Inc., directly or indirectly, owns all the operating partnership units of CyrusOne LP. As the direct or indirect owner of all the
operating partnership units of CyrusOne LP and as sole beneficial owner and sole trustee of CyrusOne GP, which is the sole general
partner of CyrusOne LP, CyrusOne Inc. has the full, exclusive and complete responsibility for the operating partnership's day-to-
day management and control.
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TABLE OF CONTENTS
PART I
ITEM 1.
BUSINESS
ITEM 1A. RISK FACTORS
ITEM 1B. UNRESOLVED STAFF COMMENTS
ITEM 2.
PROPERTIES
ITEM 3.
LEGAL PROCEEDINGS
ITEM 4. MINE SAFETY DISCLOSURES
PART II
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
ISSUER PURCHASES OF EQUITY SECURITIES
ITEM 6.
SELECTED FINANCIAL DATA
ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
OPERATIONS
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
ITEM 9.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A. CONTROLS AND PROCEDURES
ITEM 9B. OTHER INFORMATION
PART III
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
ITEM 11. EXECUTIVE COMPENSATION
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND
RELATED STOCKHOLDER MATTERS
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
PART IV
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
ITEM 16. FORM 10-K SUMMARY
SIGNATURES
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SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This Annual Report on Form 10-K (“Form 10-K”), together with other statements and information publicly disseminated by our
company, contains certain forward-looking statements within the meaning of Section 27A of the Securities Act of 1933, as amended
(the "Securities Act"), and Section 21E of the Securities Exchange Act of 1934, as amended (the "Exchange Act"). We intend such
forward-looking statements to be covered by the safe harbor provisions for forward-looking statements contained in the Private
Securities Litigation Reform Act of 1995 and include this statement for purposes of complying with these safe harbor provisions.
In particular, statements pertaining to our capital resources, portfolio performance, financial condition and results of operations
contain certain forward-looking statements. Likewise, all of our statements regarding anticipated growth in our funds from
operations and anticipated market conditions, demographics and results of operations are forward-looking statements. You can
identify forward-looking statements by the use of forward-looking terminology such as “believes,” “expects,” “may,” “will,”
“should,” “seeks,” “approximately,” “intends,” “plans,” “estimates” or “anticipates” or the negative of these words and phrases
or similar words or phrases that are predictions of or indicate future events or trends and that do not relate solely to historical
matters. You can also identify forward-looking statements by discussions of strategy, plans or intentions.
Forward-looking statements involve numerous risks and uncertainties and you should not rely on them as predictions of future
events. Forward-looking statements depend on assumptions, data or methods that may be incorrect or imprecise and we may not
be able to realize them. Should one or more of these risks or uncertainties materialize, or should underlying assumptions prove
incorrect, actual results may vary materially from those anticipated, estimated or projected.
The following factors, among others, could cause actual results and future events to differ materially from those set forth or
contemplated in the forward-looking statements:
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loss of key customers;
economic downturn, natural disaster or oversupply of data centers in the limited geographic areas that we serve;
risks related to the development of our properties and our ability to successfully lease those properties;
weakening in the fundamentals for data center real estate, including but not limited to, decreases in or slowed growth of
global data, e-commerce and demand for outsourcing of data storage and cloud-based applications;
loss of access to key third-party service providers and suppliers;
risks of loss of power or cooling which may interrupt our services to our customers;
inability to identify and complete acquisitions and operate acquired properties, including those acquired in the recently
completed acquisition of Zenium Topco Ltd. and certain other affiliated entities ("Zenium");
our failure to obtain necessary outside financing on favorable terms, or at all;
restrictions in the instruments governing our indebtedness;
risks related to environmental matters;
unknown or contingent liabilities related to our acquisitions;
significant competition in our industry;
loss of key personnel;
risks associated with real estate assets and the industry;
failure to maintain our status as a REIT or to comply with the highly technical and complex REIT provisions of the
Internal Revenue Code of 1986, as amended (the "Code");
REIT distribution requirements could adversely affect our ability to execute our business plan;
insufficient cash available for distribution to stockholders;
future offerings of debt may adversely affect the market price of our common stock;
increases in market interest rates will increase our borrowing costs and may drive potential investors to seek higher
dividend yields and reduce demand for our common stock;
market price and volume of stock could be volatile;
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international activities, including those now conducted as a result of the recently completed Zenium acquisition and land
acquisitions, are subject to special risks different from those faced by us in the United States;
the uncertainty surrounding the United Kingdom’s decision to withdraw from the European Union and around the British
Parliament’s approval of the agreement with the European Union regarding the United Kingdom’s withdrawal from the
European Union;
expanded and widened price increases in certain selective materials for data center development capital expenditures due
to international trade negotiations;
any failure to comply with anti-corruption laws and regulations could have adverse effects on our business;
legislative or other actions relating to taxes could have a negative effect on us; and
other factors affecting the real estate and technology industry generally.
While forward-looking statements reflect our good faith beliefs, they are not guarantees of future performance. For a further
discussion of these and other factors that could impact our future results, performance or transactions, see the section entitled
“Risk Factors”. Given these risks and uncertainties, investors should not place undue reliance on forward-looking statements as
a prediction of actual results. We disclaim any obligation other than as required by law to publicly update or revise any forward-
looking statement to reflect changes in underlying assumptions or factors or for new information, data or methods, future events
or other changes.
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ITEM 1.
BUSINESS
The Company
PART I
We are a fully integrated, self-managed data center real estate investment trust ("REIT") that owns, operates and develops enterprise-
class, carrier-neutral, multi-tenant and single-tenant data center properties. Founded in 2001, CyrusOne Inc. successfully completed
an initial public offering and began trading on the NASDAQ Exchange on January 18, 2013. Our data centers are generally purpose-
built facilities with redundant power and cooling. They are not network specific and enable customer connectivity to a range of
telecommunication carriers. We provide mission-critical data center facilities that protect and ensure the continued operation of
information technology ("IT") infrastructure for approximately 1,000 customers in 48 data centers and two recovery centers in 13
markets (10 cities in the U.S., London, U.K., Singapore and Frankfurt, Germany).
Recent Developments
On September 28, 2018, CyrusOne Inc. completed a public offering of 6.7 million shares of its common stock for $397.3 million,
net of underwriting discounts and expenses of approximately $18.1 million. In connection with this offering, on September 25, 2018,
CyrusOne Inc. entered into a forward sale agreement with Morgan Stanley & Co. LLC with respect to an additional 2.5 million
shares of its common stock. On December 28, 2018, the Company effected a full physical settlement of the previously announced
forward sale agreement entered into with Morgan Stanley & Co. LLC. Upon settlement, the Company issued all such shares to
Morgan Stanley & Co. LLC in its capacity as forward purchaser, in exchange for net proceeds of approximately $148.2 million.
In March 2018, the Company entered into a new senior unsecured credit agreement ("$3.0 Billion Credit Facility"). The new agreement
includes a $1.7 billion revolving credit facility (the "$1.7 Billion Revolving Credit Facility") with a maturity of March 2022 that
includes a one-year extension option exercisable by the Company, subject to certain conditions. The agreement includes a 5-year
term loan with commitments totaling $1.0 billion ("2023 Term Loan") and a $300.0 million 7-year term loan ("2025 Term Loan").
The 2023 Term Loan includes a delayed draw feature which allowed the Company to draw $300.0 million in up to three tranches
over a six-month period in multiple currencies. The Company exercised the draw as a part of the Zenium acquisition. The $1.7 Billion
Revolving Credit Facility has the option to borrow in non-USD currencies. The $3.0 Billion Credit Facility also includes an accordion
feature providing for an aggregate increase in the revolving and term components to $4.0 billion, subject to certain conditions. As
of December 31, 2018, the Company had $1,000.0 million, $300.0 million and $143.0 million outstanding under the 2023 Term
Loan, the 2025 Term Loan and the $1.7 Billion Revolving Credit Facility, respectively. The Company also assumed a €100.0 million
construction facility as part of the Zenium acquisition, which was paid off in December 2018.
On August 24, 2018, the Company completed the acquisition of Zenium. Zenium is a hyperscale data center provider in Europe with
four operating data centers in London and Frankfurt, and land sites available for development in London and Frankfurt. In connection
with the acquisition, and after giving effect to a post-closing working capital adjustment, the Company paid aggregate cash
consideration of approximately $462.8 million, net of approximately $12.7 million of cash acquired, and assumed outstanding
indebtedness of approximately $86.3 million. In the fourth quarter of 2018, the Company also paid approximately $1.0 million related
to the post-closing working capital adjustment which is included above in the aggregate cash consideration. The Company financed
the acquisition with proceeds from the $300.0 million delayed draw term loan included in the 2023 Term Loan and $174.5 million
of borrowings under the $1.7 Billion Revolving Credit Facility.
During 2018, the Company acquired 182 acres of land for future development for $182.3 million. As of December 31, 2018, the
Company has a total of 470 acres of land available for future development.
During 2018, the Company sold approximately 12.2 million shares of its common stock through its At-The-Market ("ATM") program,
through a public offering and through a forward sales agreement. The sales generated gross proceeds of approximately $723.5 million.
As of December 31, 2018, there was approximately $750.0 million in remaining capacity of the $750.0 million authorized under the
New 2018 ATM Stock Offering Program (as defined in Item 7 under "Liquidity and Capital Resources").
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The following diagram depicts our ownership structure as of December 31, 2018:
Public
Stockholders
100%
Common
Stock
CyrusOne Inc.
(the REIT)
100%
Limited
Partnership
Interest
100% Beneficial
Ownership Interest
CyrusOne GP
(sole general partner)
100% General
Partnership Interest
CyrusOne LP
(our operating partnership)
100%
100%
U.S. Taxable
REIT
Subsidiaries
100%
Non-U.S.
Taxable
REIT
Subsidiaries
Operating and Development Properties (U.S. and Non U.S. Subsidiaries)
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Our Business
We provide mission-critical data center real estate assets that protect and ensure the continued operation of IT infrastructure for our
customers. We provide twenty-four hours-a-day, seven-days-a-week security guard monitoring with customizable security features.
Our goal is to be the preferred global data center provider to the Fortune 1000, including the largest enterprises and providers of
cloud services. As of December 31, 2018, our customers included 211 of the Fortune 1000, or other companies of equivalent size,
representing approximately 76% of our annualized rent as of December 31, 2018.
Data centers are highly specialized and secure real estate assets that serve as centralized repositories of server, storage and network
equipment. They are designed to provide the space, power, cooling and network connectivity necessary to efficiently operate mission-
critical IT equipment. Telecommunications carriers typically provide network access into a data center through optical fiber. The
demand for data center infrastructure is being driven by many factors, but most importantly by significant growth in data and
increased demand for data infrastructure. The market for data center facilities includes established “traditional” enterprises that are
web-enabling their applications and business processes, as well as cloud-centric companies with sophisticated technology
requirements.
We cultivate long-term strategic relationships with our customers and provide them with solutions for their data center facilities and
IT infrastructure requirements. The Company provides high-quality colocation with robust connectivity and the flexibility for
customers to scale for future growth. Our offerings provide flexibility, reliability and security delivered through a tailored, customer
service focused platform that is designed to foster long-term relationships. We focus on technology and large cloud computing
customers that are expanding their data needs rapidly in the public and private cloud environments to provide them with solutions
that address their current and future needs. Our facilities and construction design allow us to offer flexibility in density and power
resiliency, and the opportunity for expansion as our customers' needs grow. The Company's network of 48 owned or leased data
centers and investments with other colocation providers, enable us to provide our customers with solutions in America, Europe and
Asia. The platform enables high-performance, low-cost data transfer and accessibility for customers.
As a full-service provider of data center solutions, our primary revenue sources consist of colocation rent from the lease of our data
centers and services or products we provide to our customers including managed services, equipment sales, installation and other
services. Colocation leases may include all or portions of a data center, where customers may also lease office space to support their
colocation operations. Revenue is primarily based on power usage as well as square footage. Managed services are provided in
certain contracts pursuant to contracts ranging from one to five years and include monitoring computer equipment, managing backups
and storage, utilization reporting and other related ancillary information technology services using our equipment. Equipment sales,
where title transfers to the customer, typically consist of servers, switches, networking equipment, cable infrastructure, cabinets and
other miscellaneous technology communication equipment typically installed in our colocation facilities. Other services are generally
one-time services and include installation of customer equipment, including products we sell to our tenants, performing customer
system reboots, server cabinet and cage management, power monitoring, shipping and receiving, resolving technical issues, and
other hands-on service requested by the customer.
Our Competitive Strengths
Our ability to attract and retain the world’s largest customers is attributed to the following competitive strengths, which distinguish
us from other data center operators and enable us to continue to grow our operations.
High Quality Customer Base. The high quality of our assets, combined with our reputation for serving the needs of large enterprises,
has enabled us to focus on the Fortune 1000, or other companies of equivalent size, to build a quality customer base. We currently
have nearly 1,000 customers from a broad spectrum of industries and serve nine of the top ten cloud companies. Our revenue is
generated by an enterprise customer base, as evidenced by the fact that as of December 31, 2018, 76% of our annualized rent comes
from the Fortune 1000 or other companies of equivalent size. We serve a diversity of industries, including information technology,
financial services, energy, oil and gas, mining, medical, research and consulting services and consumer goods and services.
As of December 31, 2018, Microsoft Corporation represented 18% of our revenue.
Strategically Located Portfolio. Our portfolio is located in several domestic and international markets possessing attractive
characteristics for enterprise-focused data center operations. We have domestic properties in six of the largest metropolitan areas in
the U.S. (New York, Chicago, Houston, Phoenix, San Antonio and Dallas) and five of the largest metropolitan areas for Fortune 500
headquarters (New York, Houston, Dallas, Chicago and Cincinnati). We also have six properties in international markets including
three in London, two in Frankfurt and one in Singapore. We have land in Dublin and Amsterdam under development. We believe
cities with large populations or a large number of corporate headquarters are likely to produce incremental demand for IT infrastructure.
In addition, being located close to our current and potential customers provides chief information officers (CIOs) with additional
confidence when outsourcing their data center infrastructure to us.
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Modern, High Quality, Flexible Facilities. Our portfolio includes highly efficient, reliable facilities with flexibility to customize
customer solutions and accessibility to hundreds of connectivity providers. To optimize the delivery of power, our properties include
modern engineering technologies designed to minimize unnecessary power usage and, in our newest facilities, we are able to provide
power utilization efficiency ratios that we believe to be among the best in the multi-tenant data center industry. Fortune 1000 chief
information officers ("CIOs") are dividing their application stacks into various groups as some applications require 100% availability,
while others may require significant power to support complex computing, or robust connectivity. Our facility design enables us to
deliver different power densities and resiliencies to the same customer footprint, allowing customers to tailor solutions to meet their
application needs. In addition, the National IX Platform, discussed below, provides access to hundreds of telecommunication and
Internet carriers.
Massively Modular® Construction Methods. Our Massively Modular® data center design principles allow us to efficiently stage
construction on a large scale and deliver critical power and colocation square feet (CSF) in a timeframe that we believe is one of the
best in the industry. We acquire or build a large powered shell capable of scaling with our customers’ power and colocation space
needs. Once the building shell is ready, we can build individual data center halls in portions of the building space to meet the needs
of customers on a modular basis. This modular data center hall construction can be completed in 12 to 16 weeks to meet our customers’
immediate needs. This short construction timeframe ensures a very high utilization of the assets and minimizes the time between
our capital investment and the recognition of customer revenue, favorably impacting our return on investment while also translating
into lower costs for our customers. Our design principles also allow us to add incremental equipment to increase power densities as
our customers’ power needs increase, which provides our customers with a significant amount of flexibility to manage their IT
demands. We believe this Massively Modular® approach allows us to respond to rapidly evolving customer needs, to commit capital
toward the highest return projects and to develop state-of-the-art data center facilities.
Significant Leasing Capability. Our focus on the customer, our ability to scale with their needs, and our operational excellence provide
us with embedded future growth from our customer base. During 2018, we signed new leases representing $152.7 million in annualized
revenue, with previously existing customers accounting for approximately 86% of this amount. Since December 31, 2017, we have
increased our CSF by approximately 552,000 square feet or 17%, while maintaining a high percentage of CSF utilized of 88% and
83% as of December 31, 2018 and 2017, respectively.
Significant, Attractive Expansion Opportunities. As of December 31, 2018, we had 1,670,000 net rentable square feet (NRSF) of
powered shell available for future development and approximately 470 acres of land that are available for future data center facility
development, consisting of 462 acres in US markets and eight in Europe. The powered shell available for future development in
locations that are part of our domestic portfolio consist of approximately 600,000 NRSF in the Northeast (Raleigh-Durham, Northern
Virginia and New York Metro), 594,000 NRSF in the Southwest (Texas and Phoenix) and 454,000 NRSF in the Midwest (Chicago
and Cincinnati). Our current development properties and available acreage were selected based on extensive site selection criteria
and the collective industry knowledge and experience of our management team, with a focus on markets with a strong presence of
and high demand by Fortune 1000 companies and providers of cloud services. As a result, we believe that our development portfolio
contains properties that are located in markets with attractive supply and demand conditions and that possess suitable physical
characteristics to support data center infrastructure.
Differentiated Reputation for Service. We believe that the decision CIOs make to outsource their data center infrastructure has material
implications for their businesses and, as such, CIOs look to third-party data center providers that have a reputation for serving similar
organizations and that are able to deliver a customized solution. We take a consultative approach to understanding the unique
requirements of our customers, and our design principles allow us to deliver a customized data center solution to match their needs.
We believe that this approach has helped fuel our growth. Our current customers are also often the source of new contracts, with
referrals being an important source of new customers.
Experienced Management Team. Our management team is comprised of individuals drawing on diverse knowledge and skill sets
acquired through extensive experiences in the real estate, REITs, telecommunications, technology and mission-critical infrastructure
industries.
Balance Sheet Positioned to Fund Continued Growth. As of December 31, 2018, we had $1,613.4 million in available liquidity,
including $1,549.0 million in borrowing capacity under the $3.0 Billion Credit Facility. The $3.0 Billion Credit Facility also includes
an accordion feature providing for an aggregate increase in the revolving and term components to $4.0 billion, subject to certain
conditions. We believe that we are appropriately capitalized with sufficient financial flexibility and capacity to fund our anticipated
growth.
Experienced Sales Force with Robust Partner Channel. We have an experienced sales force with a particular expertise in selling to
large enterprises and providers of cloud services, which can require extensive consultation and drive long sales cycles as these
enterprises make the initial outsourcing decision. As of December 31, 2018, we had 48 sales-related employees. We believe the
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depth, knowledge, and experience of our sales team differentiates us from other data center companies, and we are not as dependent
on brokers to identify and acquire customers as some other companies in the industry. To complement our direct sales efforts, we
have developed a robust network of partners, including value added resellers, systems integrators and hosting providers.
Business and Growth Strategies
Our objective is to grow our revenue and earnings, and maximize stockholder returns and cash flow, by continuing to expand our
data center infrastructure outsourcing business.
Increasing Revenue from Existing Customers and Properties. We have historically generated a significant portion of our revenue
growth from our existing customers. We will continue to target our existing customers because we believe that many have significant
data center infrastructure needs that have not yet been outsourced, and many will require additional data center space and power to
support their growth and their increasing reliance on technology infrastructure in their operations. To address new demand, as of
December 31, 2018, we have approximately 1,362,726 NRSF currently available for lease. We also have approximately 1,492,091
NRSF under development, as well as 1,670,000 NRSF of additional powered shell space under roof available for future development
and approximately 470 acres of land that are available for future data center facility development.
Attracting and Retaining New Customers. Increasingly, enterprises are beginning to recognize the complexities of managing data
center infrastructure in the midst of rapid technological development and innovation. We believe that these complexities, brought
about by the rapidly increasing levels of Internet traffic and data, private and public cloud adoption, obsolete existing corporate data
center infrastructure, increased power and cooling requirements and increased regulatory requirements, are all driving the need for
companies to outsource their data center facility requirements. Consequently, this will significantly increase the percentage of
companies that use third-party data center colocation services over the next several years. We believe that our high-quality assets
and reputation for serving cloud providers and large enterprises have been, and will be, key differentiators for us in attracting customers
that are outsourcing their data center infrastructure needs.
We acquire customers through a variety of channels. We have historically managed our sales process through a direct-to-the-customer
model but also utilize third-party leasing agents and indirect leasing channels to expand our universe of potential new customers.
Over the past few years, we have developed a robust network of partners in our indirect leasing channels, including value added
resellers, systems integrators and hosting providers. These channels, in combination with our marketing strategies, have enabled us
to build both a strong brand and outreach program to new customers. Throughout the life cycle of a customer’s lease with us, we
maintain a disciplined approach to monitoring their experience, with the goal of providing the highest level of customer service. This
personal attention fosters a strong relationship and trust with our customers, which leads to future growth and leasing renewals.
Expanding into New Markets. Our expansion strategy focuses on acquiring and developing new data centers, both domestically and
internationally, in markets where our customers are located and in markets with a strong presence of and high demand by Fortune
1000 customers and providers of cloud services. We conduct extensive analysis to ensure an identified market displays strong data
center fundamentals, independent of the demand presented by any particular customer. In addition, we consider markets where our
existing customers want us to be located. We regularly meet with our customers to understand their business strategies and potential
data center needs. We believe that this approach, combined with our Massively Modular® construction design, reduces the risk
associated with expansion into new markets because it provides strong visibility into our leasing opportunities and helps to ensure
targeted returns on new developments. When considering a new market, we take a disciplined approach in evaluating potential
business, property and site acquisitions, including a site’s geographic attributes, availability of telecommunications and connectivity
providers, access to power, and expected costs for development.
Growing Interconnection Business. In April 2013, we launched the National IX Platform, delivering interconnection across states
and between metro-enabled sites within the CyrusOne facility footprint and beyond. The platform enables high-performance, low-
cost data transfer and accessibility for customers seeking to connect between CyrusOne facilities, from CyrusOne to their own private
data center facility, or with one another via private peering, cross connects and/or public switching environments. Interconnection
within a facility or on the National IX Platform allows our customers to share information and conduct commerce in a highly efficient
manner not requiring a third-party intermediary, and at a fraction of the cost normally required to establish such a connection between
two enterprises. The demand for interconnection creates additional rental and revenue growth opportunities for us, and we believe
that customer interconnections increase our likelihood of customer retention by providing an environment not easily replicated by
competitors. We act as a trusted neutral party that enterprises, carriers and content companies utilize to connect to each other. In
2014, we became the first colocation provider in North America to receive multi-site certification from the Open-IX Association, a
non-profit industry group formed to promote better standards for data center interconnection and Internet Exchanges in North America.
Our Portfolio
We own and operate 48 data centers and two recovery centers totaling 6.7 million NRSF, 88% of the CSF is leased and includes 703
megawatts ("MW") of power capacity. This includes 12 buildings where the Company leases such facilities. We are lessee of
11
approximately 5.0% of our total operating NRSF as of December 31, 2018. Also included in our total NRSF, CSF and MW are pre-
stabilized assets (which include data halls that have been in service for less than 24 months and are less than 85% leased) that have
approximately 416,886 NRSF, 33% of the CSF is leased with capacity of 34 MW of power.
In addition, we have properties under development comprising approximately 1.5 million NRSF and 126 MW of power capacity.
The estimated total costs to develop these properties is between $613 million and $714 million. The final cost to develop could
change depending on the capital improvements required based on the lease contracts executed on such properties. We also have 470
acres of land available for future data center development. The following tables provide an overview of our operating and development
properties as of December 31, 2018.
12
CyrusOne Inc.
Data Center Portfolio
As of December 31, 2018
(unaudited)
Operating Net Rentable Square Feet (NRSF)(a)
Metro
Area
Annualized
Rent(c)
($000)
(000)
Colocation
Space
(CSF)(d)
CSF
Occupied
(e)
CSF
Leased(f)
Office &
Other(g)
(000)
Office &
Other
Occupied(h)
Supporting
Infrastructure(i)
(000)
Total(j)
(000)
Stabilized Properties(b)
Dallas - Carrollton
Northern Virginia - Sterling V
Houston - Houston West I
Northern Virginia - Sterling II
Cincinnati - 7th Street***
San Antonio III
Somerset I
Chicago - Aurora I
Dallas - Lewisville*
Totowa - Madison**
Dallas
Northern Virginia
$
Houston
Northern Virginia
Cincinnati
San Antonio
New York Metro
Chicago
Dallas
New York Metro
Cincinnati - North Cincinnati
Cincinnati
Wappingers Falls I**
New York Metro
Frankfurt I
San Antonio I
Phoenix - Chandler VI
Houston - Houston West II
Phoenix - Chandler II
Frankfurt
San Antonio
Phoenix
Houston
Phoenix
Northern Virginia - Sterling I
Northern Virginia
Phoenix - Chandler I
Phoenix - Chandler III
Raleigh-Durham I
Phoenix
Phoenix
Raleigh-Durham
Northern Virginia - Sterling III
Northern Virginia
Austin III
Houston - Galleria
Austin II
San Antonio II
Florence
Austin
Houston
Austin
San Antonio
Cincinnati
Northern Virginia - Sterling VI
Northern Virginia
Phoenix - Chandler IV
Phoenix - Chandler V
Cincinnati - Hamilton*
Phoenix
Phoenix
Cincinnati
Northern Virginia - Sterling IV
Northern Virginia
San Antonio IV
London I**
London II**
London - Great Bridgewater**
Houston - Houston West III
Cincinnati - Mason
Stamford - Riverbend**
Norwalk I**
Chicago - Lombard
Stamford - Omega**
Frankfurt II
Cincinnati - Blue Ash*
South Bend - Crescent*
San Antonio
London
London
London
Houston
Cincinnati
New York Metro
New York Metro
Chicago
New York Metro
Frankfurt
Cincinnati
Chicago
Totowa - Commerce**
New York Metro
Singapore - Inter Business Park**
Singapore
South Bend - Monroe
Chicago
75,701
42,039
41,911
35,853
33,493
30,781
29,786
27,797
27,050
26,469
24,322
23,705
21,973
21,586
21,190
20,822
20,501
19,878
19,456
18,548
18,522
18,172
16,427
16,021
14,860
14,106
13,518
12,384
11,285
11,162
10,803
10,349
10,271
8,527
8,304
6,274
5,569
5,374
5,340
4,378
2,427
1,242
1,185
657
567
567
379
123
305
383
112
159
197
132
97
113
114
51
65
37
53
44
148
80
74
78
74
68
76
79
62
63
44
64
53
88 %
83 %
89 %
92 %
97 %
97 %
100 % 100 %
91 %
92 %
100 % 100 %
92 %
85 %
98 %
98 %
83 %
76 %
92 %
89 %
99 % 100 %
92 %
97 %
92 %
97 %
100 % 100 %
99 %
77 %
99 %
77 %
100 % 100 %
100 % 100 %
100 % 100 %
100 % 100 %
92 %
97 %
100 % 100 %
67 %
59 %
95 %
69 %
59 %
95 %
100 % 100 %
99 %
99 %
101
68 % 100 %
73
72
47
81
60
25
49
10
53
34
20
13
14
—
45
6
3
—
3
6
100 % 100 %
100 % 100 %
74 %
74 %
100 % 100 %
100 % 100 %
100 % 100 %
100 % 100 %
94 %
94 %
34 %
34 %
100 % 100 %
23 %
23 %
99 %
99 %
62 %
62 %
— % — %
100 % 100 %
36 %
41 %
36 %
41 %
— % — %
22 %
23 %
22 %
23 %
82
11
11
9
6
9
27
34
11
22
45
20
8
6
6
4
6
6
35
2
13
7
15
23
2
11
47
—
3
1
1
7
12
12
10
—
10
26
—
4
4
19
7
7
—
20
—
—
Stabilized Properties - Total
$ 811,653
3,540
90% 92% 621
13
44 %
100 %
100 %
100 %
61 %
100 %
89 %
100 %
84 %
100 %
79 %
99 %
91 %
83 %
100 %
79 %
38 %
81 %
12 %
— %
100 %
100 %
98 %
49 %
100 %
100 %
87 %
— %
100 %
95 %
100 %
100 %
100 %
56 %
100 %
— %
100 %
98 %
— %
61 %
100 %
84 %
100 %
100 %
— %
38 %
— %
— %
77%
Powered
Shell
Available
for Future
Development
(NRSF)(k)
(000)
Available
Critical
Load
Capacity
(MW)(l)
—
64
3
—
46
—
203
27
—
—
65
—
—
11
10
11
—
—
31
—
246
—
67
—
—
—
—
—
—
94
—
—
—
9
4
—
209
—
—
87
29
—
10
—
11
—
—
4
44
57
28
30
16
24
13
71
21
6
14
3
18
12
24
12
12
12
16
14
12
15
6
14
5
12
9
21
12
12
10
15
12
10
15
1
6
4
2
2
3
—
25
1
1
—
1
1
111
138
37
55
175
43
89
223
54
59
53
15
57
46
32
55
26
49
39
30
82
34
21
25
22
41
40
—
27
16
35
34
27
58
93
1
32
17
8
41
12
4
72
2
5
6
—
6
498
532
161
223
378
184
213
371
180
133
163
72
118
96
186
139
105
132
147
101
171
120
98
112
68
117
140
101
103
89
83
122
99
95
151
11
95
78
28
58
30
22
123
15
9
26
3
13
2,148
6,309
1,241
669
CyrusOne Inc.
Data Center Portfolio
As of December 31, 2018
(Unaudited)
Operating Net Rentable Square Feet (NRSF)(a)
Annualized
Rent(c)
($000)
(000)
Colocation
Space
(CSF)(d)
CSF
Occupied
(e)
CSF
Leased(f)
Office &
Other(g)
(000)
Office &
Other
Occupied(h)
Supporting
Infrastructure(i)
(000)
Total(j)
(000)
Powered
Shell
Available
for Future
Development
(NRSF)(k)
(000)
Available
Critical
Load
Capacity
(MW)(l)
$ 811,653
3,540
90% 92% 621
77%
2,148
6,309
1,241
669
7,346
2,107
868
—
$ 821,975
75
77
48
79
3,819
76 %
76 %
—
29 %
34 %
45
21 %
21 %
—
— % — %
—
85% 88% 666
— %
— %
— %
— %
72%
21
14
—
58
2,241
96
136
48
137
6,726
—
272
—
158
1,670
6
16
6
6
703
Stabilized Properties - Total
Pre-Stabilized Properties(b)
Dallas - Carrollton (DH #6)
Chicago - Aurora II (DH #1)
Dallas - Carrollton (DH #7)
Dallas - Allen (DH #1)
All Properties - Total
Metro
Area
Dallas
Chicago
Dallas
Dallas
*
Indicates properties in which we hold a leasehold interest in the building shell and land. All data center infrastructure has been constructed by us and is
owned by us.
Indicates properties in which we hold a leasehold interest in the building shell, land, and all data center infrastructure.
**
*** The information provided for the Cincinnati - 7th Street property includes data for two facilities, one of which we lease and one of which we own.
(a) Represents the total square feet of a building under lease or available for lease based on engineers' drawings and estimates but does not include space held
for development or space used by CyrusOne.
(b) Stabilized properties include data halls that have been in service for at least 24 months or are at least 85% leased. Pre-stabilized properties include data halls
that have been in service for less than 24 months and are less than 85% leased.
(c) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of
December 31, 2018, multiplied by 12. For the month of December 2018, customer reimbursements were $112.0 million annualized and consisted of
reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary
from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From January 1, 2017 through
December 31, 2018, customer reimbursements under leases with separately metered power constituted between 10.2% and 15.1% of annualized rent. After
giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of December 31, 2018 was $829.6 million. Our
annualized effective rent was greater than our annualized rent as of December 31, 2018 because our positive straight-line and other adjustments and amortization
of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments
for services.
(d) CSF represents the NRSF at an operating facility that is currently leased or readily available for lease as colocation space, where customers locate their servers
and other IT equipment.
(e) Percent occupied is determined based on CSF billed to customers under signed leases as of December 31, 2018 divided by total CSF. Leases signed but that
have not commenced billing as of December 31, 2018 are not included.
(f) Percent leased is calculated by dividing CSF under signed leases for colocation space (whether or not the lease has commenced billing) by total CSF.
(g) Represents the NRSF at an operating facility that is currently leased or readily available for lease as space other than CSF, which is typically office and other
space.
(h) Percent occupied is determined based on Office & Other space being billed to customers under signed leases as of December 31, 2018 divided by total Office
& Other space. Leases signed but not commenced as of December 31, 2018 are not included.
(i) Represents infrastructure support space, including mechanical, telecommunications and utility rooms, as well as building common areas.
(j) Represents the NRSF at an operating facility that is currently leased or readily available for lease. This excludes existing vacant space held for development.
(k) Represents space that is under roof that could be developed in the future for operating NRSF, rounded to the nearest 1,000.
(l) Critical load capacity represents the aggregate power available for lease and exclusive use by customers expressed in terms of megawatts. The capacity
reported is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels. Does not sum to total due to
rounding.
14
CyrusOne Inc.
NRSF Under Development
As of December 31, 2018
(Dollars in millions)
(unaudited)
NRSF Under Development(a)
Under Development Costs(b)
Colocation
Space
(CSF)
(000)
Office &
Other
(000)
Supporting
Infrastructure
(000)
Powered
Shell(c)
(000)
Total
(000)
Critical
Load MW
Capacity(d)
Actual
to
Date(e)
Estimated
Costs to
Completion(f)
Total
—
46
— $ — $ 7-9 $ 7-9
1Q'19
1Q'19
1Q'19
2Q'19
2Q'19
2Q'19
2Q'19
—
—
—
7
—
171
9
13
—
Facilities
Dallas - Allen
Metropolitan
Area
Dallas
Estimated
Completion
Date
1Q'19
Northern Virginia - Sterling
V
Northern Virginia
Phoenix - Chandler VII
Phoenix
Raleigh-Durham I
Raleigh-Durham
Dallas - Carrollton
Dallas
Northern Virginia - Sterling
VI
Somerset II
London I
Northern Virginia - Sterling
VII
Northern Virginia - Sterling
VIII
Austin III
London II
Frankfurt II
Amsterdam I
Frankfurt III
Total
Northern Virginia
New York Metro
London
Northern Virginia
3Q'19
Northern Virginia
3Q'19
122
Austin
London
Frankfurt
Amsterdam
Frankfurt
3Q'19
3Q'19
3Q'19
4Q'19
2Q'20
—
32
45
39
—
439
25
—
—
—
—
35
—
—
—
4
—
—
3
28
—
96
21
7
—
—
—
52
—
—
—
25
—
—
—
40
—
269
—
—
—
—
—
93
—
—
—
—
7
269
7
—
258
9
13
93
151
—
32
48
194
301
—
144
258
814
258
1,492
6.0
—
3.0
6.0
36.0
—
5.0
—
30.0
3.0
13.0
18.0
6.0
—
—
15
1
2
43
—
—
—
24
—
—
—
1
—
25-28
44-50
6-8
25-28
59-65
7-9
17-18
19-20
95-119
138-162
4-6
4-6
12-14
12-14
33-37
33-37
142-159
166-183
17-19
30-34
50-60
65-76
17-19
30-34
50-60
66-77
66-77
66-77
126.0 $
86 $ 613-714 $699-800
(a) Represents NRSF at a facility for which activities have commenced or are expected to commence in the next 2 quarters to prepare the space for its intended
use. Estimates and timing are subject to change. May not sum to total due to rounding.
(b) London development costs are GBP-denominated and shown as USD-equivalent using exchange rate of 1.27. Frankfurt and Amsterdam development costs
are EUR-denominated and shown as USD-equivalent using exchange rate of 1.14.
(c) Represents NRSF under construction that, upon completion, will be powered shell available for future development into operating NRSF.
(d) Critical load capacity represents the aggregate power available for lease and exclusive use by customers expressed in terms of megawatts. The capacity
reported is for non-redundant megawatts, as we can develop flexible solutions to our customers at multiple resiliency levels.
(e) Actual to date is the cash investment as of December 31, 2018. There may be accruals above this amount for work completed, for which cash has not yet
been paid.
(f) Represents management’s estimate of the total costs required to complete the current NRSF under development. There may be an increase in costs if customers
require greater power density.
15
Customer Diversification
Our portfolio is currently leased to approximately 1,000 customers, many of which are leading global companies. The following
table sets forth information regarding the 20 largest customers, including their affiliates, in our portfolio based on annualized rent
as of December 31, 2018:
CyrusOne Inc.
Customer Sector Diversification(a)
As of December 31, 2018
(unaudited)
Principal Customer Industry
Number of
Locations
Annualized
Rent(b) (000)
Percentage of
Portfolio
Annualized
Rent(c)
Weighted
Average
Remaining
Lease Term in
Months(d)
1
2
3
4
5
6
7
8
9
10
11
12
13
14
15
16
17
18
19
20
Information Technology(e)
Information Technology
Information Technology
Information Technology
Financial Services
Research and Consulting Services
Information Technology
Healthcare
Telecommunication Services
Energy
Information Technology
Industrials
Telecommunication Services
Financial Services
Consumer Staples
Information Technology
Telecommunication Services
Information Technology
Information Technology
Financial Services
11 $
156,064
19.0%
5
10
7
1
3
4
2
2
1
6
5
7
2
3
2
1
3
2
1
52,716
44,325
29,937
19,097
15,791
15,585
15,099
13,513
12,610
12,004
11,400
9,950
9,506
9,162
7,994
7,823
7,819
7,187
6,600
6.4%
5.4%
3.6%
2.3%
1.9%
1.9%
1.8%
1.6%
1.5%
1.5%
1.4%
1.2%
1.2%
1.1%
1.0%
1.0%
1.0%
0.9%
0.8%
$
464,182
56.5%
95.8
67.6
39.4
32.8
147.0
25.1
44.0
108.0
31.0
19.7
23.0
9.5
22.1
56.6
25.7
66.2
106.6
109.8
11.3
17.0
67.2
(a) Customers and their affiliates are consolidated.
(b) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of
December 31, 2018, multiplied by 12. For the month of December 2018, customer reimbursements were $112.0 million annualized and consisted of
reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary
from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From January 1, 2017 through
December 31, 2018, customer reimbursements under leases with separately metered power constituted between 10.2% and 15.1% of annualized rent. After
giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of December 31, 2018 was $829.6 million. Our
annualized effective rent was greater than our annualized rent as of December 31, 2018 because our positive straight-line and other adjustments and amortization
of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments
for services.
(c) Represents the customer’s total annualized rent divided by the total annualized rent in the portfolio as of December 31, 2018, which was approximately $822.0
million.
(d) Weighted average based on customer’s percentage of total annualized rent expiring and is as of December 31, 2018, assuming that customers exercise no
renewal options and exercise all early termination rights that require payment of less than 50% of the remaining rents. Early termination rights that require
payment of 50% or more of the remaining lease payments are not assumed to be exercised because such payments approximate the profitability margin of
leasing that space to the customer, such that we do not consider early termination to be economically detrimental to us.
(e) The customer represents 19% of our annualized rent and 18% of our consolidated revenue.
16
Lease Distribution
The following table sets forth information relating to the distribution of customer leases in the properties in our portfolio, based on
NRSF under lease as of December 31, 2018:
CyrusOne Inc.
Lease Distribution
As of December 31, 2018
(unaudited)
NRSF Under Lease(a)
0-999
1,000-2,499
2,500-4,999
5,000-9,999
10,000+
Total
Number of
Customers(b)
Percentage of
All Customers
Total
Leased
NRSF(c) (000)
Percentage of
Portfolio
Leased NRSF
Annualized
Rent(d) (000)
Percentage of
Annualized Rent
672
119
74
45
82
992
68 %
12 %
7 %
5 %
8 %
100%
127
187
264
319
4,466
5,363
2 % $
4 %
5 %
6 %
83 %
100% $
71,531
43,709
44,912
52,946
608,877
821,975
9 %
5 %
6 %
6 %
74 %
100%
(a) Represents all leases in our portfolio, including colocation, office and other leases.
(b) Represents the number of customers occupying data center, office and other space as of December 31, 2018. This may vary from total customer count as
some customers may be under contract, but have yet to occupy space.
(c) Represents the total square feet at a facility under lease and that has commenced billing, excluding space held for development or space used by CyrusOne.
A customer’s leased NRSF is estimated based on such customer’s direct CSF or office and light-industrial space plus management’s estimate of infrastructure
support space, including mechanical, telecommunications and utility rooms, as well as building common areas.
(d) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of
December 31, 2018, multiplied by 12. For the month of December 2018, customer reimbursements were $112.0 million annualized and consisted of
reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary
from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From January 1, 2017 through
December 31, 2018, customer reimbursements under leases with separately metered power constituted between 10.2% and 15.1% of annualized rent. After
giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of December 31, 2018 was $829.6 million. Our
annualized effective rent was greater than our annualized rent as of December 31, 2018 because our positive straight-line and other adjustments and amortization
of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments
for services.
17
Lease Expiration
The following table sets forth a summary schedule of the customer lease expirations for leases in place as of December 31, 2018,
plus available space, for each of the 10 full calendar years beginning January 1, 2019, at the properties in our portfolio.
CyrusOne Inc.
Lease Expirations
As of December 31, 2018
(unaudited)
Year(a)
Available
Month-to-Month
2019
2020
2021
2022
2023
2024
2025
2026
2027
2028
2029 - Thereafter
Total
Number of
Leases
Expiring(b)
Total Operating
NRSF Expiring
(000)
Percentage of
Total NRSF
Annualized
Rent(c) (000)
Percentage of
Annualized Rent
Annualized Rent
at Expiration(d)
(000)
Percentage of
Annualized Rent
at Expiration
1,363
20 %
759
2,250
1,686
1,851
337
266
60
46
31
19
16
13
100
574
594
722
539
720
266
186
590
438
265
369
1 % $
32,002
4 % $
9 %
9 %
11 %
8 %
11 %
4 %
3 %
9 %
6 %
4 %
5 %
107,469
104,107
127,330
77,359
86,821
39,767
29,672
86,809
66,807
29,576
34,256
13 %
13 %
15 %
9 %
11 %
5 %
4 %
10 %
8 %
4 %
4 %
34,396
108,352
106,016
136,913
83,552
119,285
48,527
34,024
92,627
86,233
34,941
41,324
4 %
12 %
11 %
15 %
9 %
13 %
5 %
4 %
10 %
9 %
4 %
4 %
7,334
6,726
100% $
821,975
100% $
926,190
100%
(a) Leases that were auto-renewed prior to December 31, 2018 are shown in the calendar year in which their current auto-renewed term expires. Unless otherwise
stated in the footnotes, the information set forth in the table assumes that customers exercise no renewal options and exercise all early termination rights that
require payment of less than 50% of the remaining rents. Early termination rights that require payment of 50% or more of the remaining lease payments are
not assumed to be exercised.
(b) Number of leases represents each agreement with a customer. A lease agreement could include multiple spaces and a customer could have multiple leases.
(c) Represents monthly contractual rent (defined as cash rent including customer reimbursements for metered power) under existing customer leases as of
December 31, 2018, multiplied by 12. For the month of December 2018, customer reimbursements were $112.0 million annualized and consisted of
reimbursements by customers across all facilities with separately metered power. Customer reimbursements under leases with separately metered power vary
from month-to-month based on factors such as our customers' utilization of power and the suppliers' pricing of power. From January 1, 2017 through
December 31, 2018, customer reimbursements under leases with separately metered power constituted between 10.2% and 15.1% of annualized rent. After
giving effect to abatements, free rent and other straight-line adjustments, our annualized effective rent as of December 31, 2018 was $829.6 million. Our
annualized effective rent was greater than our annualized rent as of December 31, 2018 because our positive straight-line and other adjustments and amortization
of deferred revenue exceeded our negative straight-line adjustments due to factors such as the timing of contractual rent escalations and customer prepayments
for services.
(d) Represents the final monthly contractual rent under existing customer leases that had commenced as of December 31, 2018, multiplied by 12.
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Regulation
General
Properties in our markets are subject to various laws, ordinances and regulations, including regulations relating to common areas.
In addition to the regulations described below, we are subject to various federal, state and local regulations, such as state and local
fire and life safety regulations. We believe that each of our properties has, or is expected to have when required, the necessary permits
and approvals for us to operate our business.
Americans With Disabilities Act
Our properties must comply with Title III of the Americans with Disabilities Act of 1990, or the ADA, to the extent that such properties
are “public accommodations” as defined by the ADA. The ADA may require removal of structural barriers to access by persons with
disabilities in certain public areas of our properties where such removal is readily achievable. We believe that our properties are in
substantial compliance with the ADA and that we will not be required to make substantial capital expenditures to address the
requirements of the ADA. However, noncompliance with the ADA could result in imposition of fines or an award of damages to
private litigants. The obligation to make readily achievable accommodations is an ongoing one, and we will continue to assess our
properties and to make alterations as appropriate in this respect.
Environmental Matters
We are subject to laws and regulations relating to the protection of the environment, the storage, management and disposal of hazardous
materials, emissions to air and discharges to water, the cleanup of contaminated sites and health and safety matters. These include
various regulations promulgated by the Environmental Protection Agency and other federal, state, and local regulatory agencies and
legislative bodies relating to our operations, including those involving power generators, batteries, and fuel storage to support co-
location infrastructure. While we believe that our operations are in substantial compliance with environmental, health, and human
safety laws and regulations, as an owner or operator of property and in connection with the current and historical use of hazardous
materials and other operations at its sites, we could incur significant costs, including fines, penalties and other sanctions, cleanup
costs and third-party claims for property damages or personal injuries, as a result of violations of or liabilities under environmental
laws and regulations. Fuel storage tanks are present at many of our properties, and if releases were to occur, we may be liable for
the costs of cleaning up resulting contamination. Some of our sites also have a history of previous commercial operations, including
past underground storage tanks.
Some of the properties may contain asbestos-containing building materials. Environmental laws require that asbestos-containing
building materials be properly managed and maintained and may impose fines and penalties on building owners or operators for
failure to comply with these requirements.
Environmental consultants have conducted Phase I or similar non-intrusive environmental site assessments on recently acquired
properties and, if appropriate, additional environmental inquiries and assessments. Nonetheless, we may acquire or develop sites in
the future with unknown environmental conditions from historical operations. Although we are not aware of any sites at which we
currently have material remedial obligations, the imposition of remedial obligations as a result of spill or the discovery of contaminants
in the future could result in significant additional costs to us.
Our operations also require us to obtain permits and/or other governmental approvals and to develop response plans in connection
with the use of our generators or other operations. These requirements could restrict our operations or delay the development of data
centers in the future. In addition, from time to time, federal, state or local government regulators enact new or revise existing legislation
or regulations that could affect us, either beneficially or adversely. As a result, we could incur significant costs in complying with
environmental laws or regulations that are promulgated in the future.
Insurance
We carry comprehensive liability, fire, extended coverage, business interruption and rental loss insurance covering all of the properties
in our portfolio under a blanket policy. In the opinion of our management, our policy specifications, limits and insurance carriers are
appropriate given the relative risk of loss, the cost of coverage and industry practice. We cannot provide any assurance that the
business interruption or property insurance we have will cover all losses that we may experience, that the insurance carrier will be
solvent, that rates will remain commercially reasonable, that insurance carriers will not cancel our policies, or that the insurance
carriers will pay all claims made by us. Certain circumstances, such as acts of war, are generally uninsurable under our policies. See
also “Risk Factors-Risks Related to Our Business and Operations." Any losses to our properties that are not covered by insurance,
or that exceed our policy coverage limits, could adversely affect our business, financial condition and results of operations.
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Competition
We compete with numerous developers, owners and operators of technology-related real estate, many of which own properties similar
to ours in the same markets in which our properties are located. If our competitors offer space at rental rates below current market
rates or below the rental rates we currently charge our customers, or if our competitors offer space that tenants perceive to be superior
to ours (based on factors such as available power, security considerations, location or connectivity), we may lose potential customers
and we may be pressured to reduce our rental rates below those we currently charge in order to retain customers when our customers’
leases expire or incur costs to improve our properties. In addition, our customers have the option of building their own data center
space which can also place pressure on our rental rates.
As a developer of data center space and provider of interconnection services, we also compete for the services of key third-party
providers of services, including engineers and contractors with expertise in the development of data centers. There is competition
for the services of specialized contractors and other third-party providers required for the development of data centers, increasing
the cost of engaging such providers and the risk of delays in completing our development projects.
In addition, we face competition from real estate developers in our sector and in other industries for the acquisition of additional
properties suitable for the development of data centers. Such competition may reduce the number of properties available for acquisition,
increase the price of these properties and reduce the demand for data center space in the markets we seek to serve.
Employees
As of December 31, 2018, we employ approximately 448 persons, including 44 international employees. None of these employees
are represented by a labor union.
Financial Information
For financial information related to our operations, please refer to the financial statements including the notes thereto, included in
this Form 10-K.
How to Obtain Our SEC Filings
We file annual, quarterly and current reports, proxy statements and other information with the Securities and Exchange Commission
(SEC). All reports we file with the SEC will be available free of charge via EDGAR through the SEC website at http://www.sec.gov.
We make available our reports on Forms 10-K, 10-Q, and 8-K (as well as all amendments to these reports), and other information,
free of charge, at the "Investors" section of our website at http://www.cyrusone.com. The information found on, or otherwise accessible
through, our website is not incorporated by reference into, nor does it form a part of, this report or any other document that we file
with the SEC.
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ITEM 1A.
RISK FACTORS
You should carefully consider all the risks described below, as well as the other information contained in this document when
evaluating your investment in our securities. Any of the following risks could materially and adversely affect our business, results
of operations or financial condition. The risks and uncertainties described below are those that we currently believe may materially
affect our Company. Additional risks and uncertainties of which we are unaware or that we currently deem immaterial also may
become important factors that affect our Company. The occurrence of any of the following risks might cause you to lose all or a
part of your investment. Some statements in this Form 10-K, including statements in the following risk factors, constitute forward-
looking statements. Please refer to the section entitled “Special Note Regarding Forward-Looking Statements.”
Risks Related to Our Business and Operations
A small number of customers account for a significant portion of our revenue. The loss or significant reduction in business
from one or more of our large customers could significantly harm our business, financial condition and results of operations,
and impact the amount of cash available for distribution to our stockholders.
We currently depend, and expect to continue to depend, upon a relatively small number of customers for a significant percentage
of our revenue. Our top 10 customers collectively accounted for approximately 46% of our total annualized rent as of December 31,
2018. We have one customer which accounted for approximately 18% of our revenue as of December 31, 2018. As a result of this
customer concentration, our business, financial condition and results of operations, including the amount of cash available for
distribution to our stockholders, could be adversely affected if we lose one or more of our larger customers, if one or more of such
customers significantly reduce their business with us or if we choose not to enforce, or to enforce less vigorously, any rights that
we may have now or in the future against these significant customers because of our desire to maintain our relationship with them.
A significant percentage of our customer base is also concentrated in two industry sectors: information technology and financial
services. Enterprises in the information technology and financial services sectors comprised approximately 51% and 17%
respectively, of our annualized rent as of December 31, 2018. A downturn in one of these industries could negatively impact the
financial condition of one or more of our information technology, financial services or energy customers, including several of our
larger customers. In addition, instability in financial markets and economies generally may adversely affect our customers’ ability
to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure
requirements and may result in adverse effects on our customers’ financial condition and results of operations. As a result of these
factors, customers could default on their obligations to us, delay the purchase of new services from us or decline to renew expiring
leases, any of which could have an adverse effect on our business, financial condition and results of operations.
Additionally, if any customer becomes a debtor in a case under the U.S. Bankruptcy Code, applicable bankruptcy laws may limit
our ability to terminate our contract with such customer solely because of the bankruptcy or recover any amounts owed to us under
our agreements with such customer. In addition, applicable bankruptcy laws could allow the customer to reject and terminate its
agreement with us, with limited ability for us to collect the full amount of our damages. Our business, including our revenue and
cash available for distribution to our stockholders, could be adversely affected if any of our significant customers were to become
bankrupt or insolvent.
A significant percentage of our customer leases expire each year or are on a month-to-month basis, and many of our leases
contain early termination provisions. If leases with our customers are not renewed on the same or more favorable terms
or are terminated early by our customers, our business, financial condition and results of operations could be substantially
harmed.
Our customers may not renew their leases upon expiration. This risk is increased by the significant percentage of our customer
leases that expire every year. As of December 31, 2018, leases representing 13%, 13% and 15% of the annualized rent for our
portfolio will expire during 2019, 2020 and 2021, respectively, and an additional 4% of the 2018 annualized rent for our portfolio
was from month-to-month leases. While historically we have retained a significant number of our customers, including those
leasing from us on a month-to-month basis, upon expiration our customers may elect not to renew their leases or renew their leases
at lower rates, for less space, for fewer services or for shorter terms. If we are unable to successfully renew or continue our customer
leases on the same or more favorable terms or subsequently re-lease available data center space when such leases expire, our
business, financial condition and results of operations could be adversely affected.
In addition, many of our leases contain early termination provisions that allow our customers to reduce the term of their leases
subject to payment of an early termination charge that is often a specified portion of the remaining rent payable on such leases.
The exercise by customers of early termination options could have an adverse effect on our business, financial condition and results
of operations.
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We generate a substantial portion of our revenue from a small number of metropolitan markets, which makes us more
susceptible to regional economic downturns.
Our properties are located in 13 distinct markets (10 in the U.S., London, U.K., Singapore and Frankfurt, Germany). Cincinnati,
Dallas, Houston, New York Metro, Northern Virginia, Phoenix and San Antonio accounted for approximately 84% of our annualized
rent as of December 31, 2018. As such, we are potentially susceptible to local economic conditions and the supply of, and demand
for, data center space in these markets. If there is a downturn in the economy, a natural disaster or an oversupply of, or decrease
in demand for, data centers in these markets, our business could be adversely affected to a greater extent than if we owned a real
estate portfolio that was more diversified in terms of both geography and industry focus.
Even if we have additional space available for lease at any one of our data centers, our ability to meet existing customer
requirements or lease this space to existing or new customers could be constrained by our ability to provide sufficient
electrical power and cooling capacity.
Customers are increasing their deployment of high-density IT equipment in our data centers, which has increased the demand for
power and cooling capacity. As current and future customers increase their power footprint in our facilities over time, we may be
required to upgrade or add to our existing infrastructure or add additional infrastructure to meet customer requirements. Power
and cooling systems are difficult and expensive to upgrade, and such changes may be required at a time or on a timeline during
which we lack the financial or operational ability to make such changes. Our failure to timely upgrade or add additional infrastructure
could result in a failure to meet the requirements of our existing customers, or limit our ability to increase occupancy rates or
density within our existing facilities, whether for new or existing customers. Similarly, even when successful in implementing
such changes, we may not be able to pass on any additional costs to our customers.
We do not own all of the buildings in which our data centers are located. Instead, we lease or sublease certain of our data
center spaces and the ability to retain these leases or subleases could be a significant risk to our ongoing operations.
We do not own 12 buildings that account for approximately 639,720 NRSF, or approximately 5% of our total operating NRSF.
These leased buildings accounted for 6% of our total annualized rent as of December 31, 2018. In addition, future companies that
we acquire, particularly outside of the U. S., may lease facilities instead of owning them. Our business could be harmed if we are
unable to renew the leases for these data centers on favorable terms or at all. Additionally, in several of our smaller facilities we
sublease our space, and our rights under these subleases are dependent on our sublandlord retaining its rights under the prime
lease. When the primary terms of our existing leases and subleases expire, we generally have the right to extend the terms of our
leases and subleases for one or more renewal periods, subject to, in the case of several of our subleases, our sublandlord renewing
its term under the prime lease. For four of these leases and subleases, the renewal rent will be determined based on the fair market
value of rental rates for the property, and the then prevailing rental rates may be higher than the current rental rates under the
applicable lease. The rent for the remaining leases and subleases will be based on a fixed percentage increase over the base rent
during the year immediately prior to expiration. Several of our data centers are leased or subleased from other data center companies,
which may increase our risk of non-renewal or renewal on less than favorable terms. If renewal rates are less favorable than those
we currently have, we may be required to increase revenues within existing data centers to offset such increase in lease payments.
Failure to increase revenues to sufficiently offset these projected higher costs would adversely impact our operating income. Upon
the end of our renewal options, we would have to renegotiate our lease terms with the applicable landlords.
Additionally, if we are unable to renew the lease at any of our data centers, we could lose customers due to the disruptions in their
operations caused by the relocation. We could also lose those customers that choose our data centers based on their locations. In
addition, it is not typical for us to relocate data center infrastructure equipment, such as generators, power distribution units and
cooling units, from their initial installation. The costs of relocating such equipment to different data centers could be prohibitive
and, as such, we could lose the value of this equipment. For these reasons, any lease that cannot be renewed could adversely affect
our business, financial condition and results of operations.
Any losses to our properties that are not covered by insurance, or that exceed our coverage limits, could adversely affect
our business, financial condition and results of operations.
The properties in our portfolio are subject to risks, including from causes related to riots, war, terrorism or acts of God. For example,
our properties located in Texas are generally subject to risks related to tropical storms, tornadoes, hurricanes, floods and other
severe weather or natural events and our properties located in the Midwest are generally subject to risks related to earthquakes,
tornadoes and other severe weather. All our properties could have unknown title defects or encumbrances. While we carry
commercial property insurance including business interruption, flood and earth movement covering all of the properties in our
portfolio, and title insurance on a substantial number of our properties, the amount of insurance coverage may not be sufficient to
fully cover losses we may incur.
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If we experience a loss that is uninsured or exceeds our policy coverage limits, we could lose the capital invested in the damaged
properties as well as the anticipated future cash flows from those properties. In addition, if the damaged properties were subject
to recourse indebtedness, we could continue to be liable for the indebtedness even if these properties were irreparably damaged
or subject of a loss.
In addition, even if a title defect or damage to our properties is covered by insurance, a disruption of our business caused by a
casualty event may result in the loss of business or customers. The business interruption insurance we carry may not fully compensate
us for the loss of business or customers due to an interruption caused by a title defect or casualty event.
A failure of an insurance company to make payments to us upon an event of loss covered by an insurance policy could adversely
affect our business, financial condition and results of operations. We monitor our insurance carrier's financial strength rating and
financial size category by only placing insurance with carriers who have an A.M. Best Rating of A- XII or better. However, it can
be difficult to evaluate the stability and net assets or capitalization of insurance companies, and any insurance company's ability
to meet its claim payment obligations.
Any failure of our physical infrastructure or services could lead to significant costs and disruptions that could reduce our
revenues and harm our brand and reputation.
Our business depends on providing customers with a highly reliable data center environment. We may fail to provide such service
as a result of numerous factors, including:
•
•
•
•
•
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•
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human error;
failure to timely deploy adequate infrastructure to meet customer requirements;
unexpected equipment failure;
power loss or telecommunications failures;
improper building maintenance by us, our vendors, or by our landlords in the buildings that we lease;
physical or electronic security breaches;
fire, tropical storm, hurricane, tornado, flood, earthquake and other natural disasters;
water damage;
war, terrorism and any related conflicts or similar events worldwide; and
sabotage and vandalism.
Problems at one or more of our data centers, whether or not within our control, could result in service interruptions or equipment
damage. Substantially all of our leases with our customers include terms requiring us to meet certain service level commitments
primarily in terms of electrical output to, and maintenance of environmental conditions in, the data center raised floor space leased
by such customers. Any failure to meet these commitments or any equipment damage in our data centers, including as a result of
mechanical failure, power outage, human error on our part or other reasons, could subject us to liability under our lease terms,
including service level credits against customer rent payments, or, in certain cases of repeated failures, the right by the customer
to terminate the lease. For example, although our data center facilities are engineered to reliably power and cool our customers’
computing equipment, it is possible that an outage could adversely affect a facility’s power and cooling capabilities, and, in the
past, certain of our facilities have experienced minor outages. Depending on the frequency and duration of these outages, the
affected customers may have the right to terminate their lease, which could have a negative impact on our business. We may also
be required to expend significant financial resources to upgrade or add to existing infrastructure to meet customer requirements
for power and cooling, and we may not be financially or operationally able to do so in a timely manner.
We may be vulnerable to security breaches or cyber-attacks which could disrupt our operations and have a material adverse
effect on our financial performance and operating results.
Security breaches, cyber-attacks, or disruption, of our or our customers' physical or information technology infrastructure, networks
and related management systems could result in, among other things, unauthorized access to our facilities, a breach of our and our
customers’ networks and information technology infrastructure, the misappropriation of our or our customers’ or their customers’
proprietary or confidential information, interruptions or malfunctions in our or our customers’ operations, delays or interruptions
to our ability to meet customer needs, breach of our legal, regulatory or contractual obligations, inability to access or rely upon
critical business records or other disruptions in our operations. Numerous sources can cause these types of incidents, including:
physical or electronic security breaches? viruses, ransomware or other malware? hardware vulnerabilities such as Meltdown and
Spectre? accident or human error by our own personnel or third parties? criminal activity or malfeasance (including by our own
personnel)? fraud or impersonation scams perpetrated against us or our partners or customers? or security events impacting our
third-party service providers or our partners or customers. Our exposure to cybersecurity threats and negative consequences of
cybersecurity breaches will likely increase as we store increasing amounts of customer data. Additionally, as we increasingly
market the security features in our data centers, our data centers may be targeted by computer hackers seeking to compromise data
security.
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We recognize the increasing volume of cyber-attacks and employ commercially practical efforts to provide reasonable assurance
such attacks are appropriately mitigated. Each year, we evaluate the threat profile of our industry to stay abreast of trends and to
provide reasonable assurance our existing countermeasures will address any new threats identified. We may be required to expend
significant financial resources to protect against or respond to such breaches. Cyber criminals are increasingly using powerful new
tactics including evasive applications, proxies, tunneling, encryption techniques, vulnerability exploits, buffer overflows,
distributed denial of service attacks, or distributed denial-of-service or DDoS attacks, botnets and port scans. Techniques used to
breach security change frequently, and are generally not recognized until launched against a target, so we may not be able to
promptly detect that a security breach or unauthorized access has occurred. We also may not be able to implement security measures
in a timely manner or, if and when implemented, we may not be able to determine the extent to which these measures could be
circumvented. As we provide assurances to our customers that we provide a high level of security, if an actual or perceived security
breach occurs, the market’s perception of our security measures could be harmed and we could lose sales and current and potential
customers, and such a breach could be particularly harmful to our brand and reputation. Any breaches that may occur could also
expose us to increased risk of lawsuits, material monetary damages, potential violations of applicable privacy and other laws,
penalties and fines, loss of existing or potential customers, harm to our reputation and increases in our security and insurance costs,
which could have a material adverse effect on our business, financial condition and results of operations. In the event of a breach
resulting in loss of data, such as personally identifiable information or other such data protected by data privacy or other laws, we
may be liable for damages, fines and penalties for such losses under applicable regulatory frameworks despite not handling the
data. Furthermore, if a high profile security breach or cyber-attack occurs with respect to another provider of mission-critical data
center facilities, our customers and potential customers may lose trust in the security of these business models generally, which
could harm our ability to retain existing customers or attract new ones. We cannot guarantee that any backup systems, regular data
backups, security protocols, network protection mechanisms and other procedures currently in place, or that may be in place in
the future, will be adequate to prevent network and service interruption, system failure, damage to one or more of our systems or
data loss in the event of a security breach or attack on our facilities.
In addition, the regulatory framework around data custody, data privacy and breaches varies by jurisdiction and is an evolving
area of law with increasingly complex and rigorous regulatory standards enacted to protect business and personal data in the U.S.
and elsewhere. We may not be able to limit our liability or damages in the event of such a loss. For example, the European Union
recently adopted the General Data Protection Regulation (the "GDPR"). The GDPR imposes additional obligations on companies
regarding the handling of personal data and provides certain individual privacy rights to persons whose data is stored. Data
protection legislation is also becoming increasingly common in the United States at both the federal and state level and may require
us to further modify our data processing practices and policies. For example, the state of California, where we recently acquired
property for the first time in Santa Clara and expect to build our first Silicon Valley data center, recently adopted the California
Consumer Privacy Act of 2018, which is currently set to take effect on January 1, 2020 and expected to provide California residents
with increased privacy rights and protections with respect to their personal information. Compliance with existing, proposed and
recently enacted laws and regulations can be costly; any failure to comply with these regulatory standards could subject us to legal
and reputational risks. Misuse of or failure to secure personal information could also result in violation of data privacy laws and
regulations, proceedings against the Company by governmental entities or others, fines and penalties, damage to our reputation
and credibility and could have a negative impact on our business and results of operations.
Our growth depends on the development of our properties and our ability to successfully lease those properties, and any
delays or unexpected costs associated with such projects or the ability to lease such properties may harm our growth
prospects, future business, financial condition and results of operations.
Our growth depends in part upon successfully developing properties into operating data center space. Current and future
development projects will involve substantial planning, allocation of significant company resources and certain risks, including
risks related to zoning, regulatory approvals, construction costs and delays, as well as our ability to raise capital, including both
debt and equity, to finance such projects. These projects will also require us to carefully select and rely on the experience of one
or more general contractors and associated subcontractors during the construction process. Should a general contractor or significant
subcontractor experience financial or other problems during the construction process, we could experience significant delays,
increased costs to complete the project and other negative impacts to our expected returns, as well as reputational risk. Site selection
is also a critical factor in our expansion plans, and there may not be suitable properties available in our markets at a location that
is attractive to our customers and has the necessary combination of access to multiple network providers, a significant supply of
electrical power, high ceilings and the ability to sustain heavy floor loading. Furthermore, while we may prefer to locate new data
centers adjacent to our existing data centers, we may be limited by the inventory and location of suitable properties.
In addition, in developing new properties, we will be required to secure an adequate supply of power from local utilities, which
may include unanticipated costs. For example, we could incur increased costs to develop utility substations on our properties in
order to accommodate our power needs. Any inability to secure an appropriate power supply on a timely basis or on acceptable
financial terms could adversely affect our ability to develop the property on an economically feasible basis, or at all.
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We regularly monitor commodity and labor pricing trends related to our data center development capital expenditures, where a
large proportion of our current development project costs are under firm price commitments. Should the proportion of such project
costs that are firm price commitments decline, there could be corresponding price increases in certain selective materials, including
due to recent international trade negotiations, which could significantly increase our overall development costs.
These and other risks could result in delays or increased costs or prevent the completion of our development projects and growth
of our business, which could adversely affect our business, financial condition and results of operations.
In addition, we have in the past undertaken development projects prior to obtaining commitments from customers to lease the
related data center space. We will likely choose to undertake future development projects under similar terms. Such development
involves the risk that we will be unable to attract customers to the relevant properties on a timely basis or at all. If we are unable
to attract customers and our properties remain vacant or underutilized for a significant amount of time, our business, financial
condition and results of operations could be adversely affected.
We are dependent upon third-party suppliers for power and certain other services, and we are vulnerable to service failures
of our third-party suppliers and to price increases by such suppliers.
We rely on third-party local utilities to provide power to our data centers. We are therefore subject to an inherent risk that such
local utilities may fail to deliver such power in adequate quantities or on a consistent basis, and our recourse against the utility
and ability to control such failures may be limited. If power delivered from the local utility is insufficient or interrupted, we would
be required to provide power through the operation of our on-site generators, generally at a significantly higher operating cost
than we would pay for an equivalent amount of power from the local utility. We may not be able to pass on the higher cost to our
customers. In addition, if the generator power were to fail, we would generally be subject to paying service level credits to our
customers, who may in certain instances also have the right to terminate their leases. Furthermore, any sustained loss of power
could reduce the confidence of our customers in our services thereby impairing our ability to attract and retain customers, which
would adversely affect both our ability to generate revenues and our results of operations.
In addition, even when power supplies are adequate, we may be subject to pricing risks and unanticipated costs associated with
obtaining power from various utility companies. While we actively seek to lock-in utility rates, many factors beyond our control
may increase the rate charged by the local utility. For instance, municipal utilities in areas experiencing financial distress may
increase rates to compensate for financial shortfalls unrelated to either the cost of production or the demand for electricity. Utilities
may be dependent on, and be sensitive to price increases for, a particular type of fuel, such as coal, oil or natural gas. In addition,
the price of these fuels and the electricity generated from them could increase as a result of proposed legislative measures related
to climate change or efforts to regulate carbon emissions. In any of these cases, increases in the cost of power at any of our data
centers could put those locations at a competitive disadvantage relative to data centers served by utilities that can provide less
expensive power. These pricing risks are particularly acute with respect to our customer leases that are structured on a full-service
gross basis, where the customer pays a fixed amount for both colocation rental and power. Our business, financial condition and
results of operations could be adversely affected in the event of an increase in utility rates under these leases, which, as of
December 31, 2018, accounted for approximately 16% of our leased NRSF, because we may be limited in our ability to pass on
such costs to these customers.
We depend on third parties to provide network connectivity to the customers in our data centers, and any delays or
disruptions in connectivity may adversely affect our business, financial condition and results of operations.
Our customers require internet connectivity and connectivity to the fiber networks of multiple third-party telecommunications
carriers. In order for us to attract and retain customers, our data centers need to provide sufficient access for customers to connect
to those carriers. While we provide space and facilities in our data centers for carriers to locate their equipment and connect
customers to their networks, any carrier may elect not to offer its services within our data centers or may elect to discontinue its
service. Furthermore, carriers may periodically experience business difficulties which could affect their ability to provide
telecommunications services, or the service provided by a carrier may be inadequate or of poor quality. If carriers were to terminate
connectivity within our data centers or if connectivity were to be degraded or interrupted, it could put that data center at a competitive
disadvantage versus a competitor’s data center that does provide adequate connectivity. A material loss of adequate third-party
connectivity could have an adverse effect on the businesses of our customers and, in turn, our own results of operations and cash
flow.
Furthermore, each new data center that we develop requires significant amounts of capital to be expended by third-party
telecommunications carriers for the construction and operation of a sophisticated redundant fiber network. The construction required
to connect multiple carrier facilities to our data centers is complex and involves factors outside of our control, including regulatory
requirements, the availability of construction resources and the sufficiency of such third-party telecommunications carriers’
financial resources to fund the construction. Additionally, hardware or fiber failures could cause significant loss of connectivity.
If we are unable to establish highly diverse network connectivity to our data centers, or if such network connectivity is materially
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delayed, is discontinued or is subject to failure, our ability to attract new customers or retain existing customers may be negatively
affected and, as a result our results of operations and cash flows may be adversely affected.
The loss of access to key third-party technical service providers and suppliers could adversely affect our current and any
future development projects.
Our success depends, to a significant degree, on having timely access to certain key third-party technical personnel who are in
limited supply and great demand, such as engineering firms and construction contractors capable of developing our properties,
and to key suppliers of electrical and mechanical equipment that complement the design of our data center facilities. For any future
development projects, we will continue to rely on these personnel and suppliers to develop and equip our data centers. Competition
for such technical expertise is intense, and there are a limited number of electrical and mechanical equipment suppliers that design
and produce the equipment that we require. We may not always have or retain access to such key service providers and equipment
suppliers, which could adversely affect our current and any future development projects.
The long sales cycle for data center services may adversely affect our business, financial condition and results of operations.
A customer’s decision to lease space in one of our data centers and to purchase additional services from us typically involves a
significant commitment of resources, significant contract negotiations regarding the service level commitments, and significant
due diligence on the part of the customer regarding the adequacy of our facilities, including the adequacy of carrier connections.
As a result, the sale of data center space has a long sales cycle. Furthermore, we may expend significant time and resources in
pursuing a particular sale or customer that may not result in revenue. Our inability to adequately manage the risks associated with
the data center sales cycle may adversely affect our business, financial condition and results of operations.
Our international activities are subject to special risks different from those faced by us in the United States, and we may
not be able to effectively manage our international business.
Our activities are primarily based in the United States with a more limited presence in Europe and Southeast Asia and, through
our strategic partnership with GDS Holdings Limited ("GDS"), the People’s Republic of China (PRC). Most recently, in August
2018 we increased our presence in Europe as a result of the Zenium acquisition. Expanding our international activities involves
risks not generally associated with activities or investments in the United States, including:
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our limited knowledge of and relationships with sellers, customers, contractors, suppliers or other parties in these markets;
complexity and costs associated with staffing and managing international development and operations;
difficulty in hiring qualified management, sales and construction personnel and service providers in a timely fashion;
problems securing and maintaining the necessary physical and telecommunications infrastructure;
multiple, conflicting and changing legal, regulatory, entitlement and permitting, and tax and treaty environments with
which we have limited familiarity;
exposure to increased taxation, confiscation or expropriation;
fluctuations in foreign currency exchange rates, currency transfer restrictions and limitations on our ability to distribute
cash earned in foreign jurisdictions to the United States;
longer payment cycles and problems collecting accounts receivable;
laws and regulations on content distributed over the Internet that are more restrictive than those in the United States;
evolving and uncertain local laws, regulations and licenses, including the implementation and enforcement thereof,
particularly in the PRC;
difficulty in enforcing agreements in non-U.S. jurisdictions, including those entered into in connection with our
acquisitions, or with our investment in and strategic partnership with GDS, or in the event of a default by one or more
of our customers, suppliers or contractors;
political and economic instability, including sovereign credit risk, in certain geographic regions;
the uncertain impact of the United Kingdom’s vote to leave the European Union (commonly known as "Brexit") and the
uncertainty around the British Parliament's approval of the agreement with the European Union regarding its withdrawal
from the European Union as discussed in “The uncertainty surrounding the United Kingdom’s decision to withdraw from
the European Union and around the British Parliament’s approval of the agreement with the European Union regarding
the United Kingdom’s withdrawal from the European Union may have a negative effect on global economic conditions,
financial markets and our business, which could adversely affect our results of operations” below; and
exposure to restrictive foreign labor law practices.
Our inability to overcome these risks could adversely affect our foreign operations, partnerships and growth prospects and could
harm our business, financial condition and results of operations.
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We may be unable to identify and complete acquisitions and successfully operate acquired properties.
We continually evaluate the market for available properties and may acquire data centers or properties suited for data center
development when opportunities exist. Our ability to complete acquisitions on favorable terms and to successfully develop and
operate acquired properties involves significant risks, including:
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we may be unable to acquire a desired property because of competition from other data center companies or real estate
investors;
even if we are able to acquire a desired property, competition from other potential acquirers may significantly increase
the purchase price of such property;
we may be unable to realize the intended benefits from acquisitions or achieve anticipated operating or financial results;
we may be unable to finance the acquisition on favorable terms or at all;
we may underestimate the costs to make necessary improvements to acquired properties;
we may be unable to quickly and efficiently integrate new acquisitions into our existing operations resulting in disruptions
to our operations or the diversion of our management’s attention;
acquired properties may be subject to reassessment, which may result in higher than expected tax payments;
we may not be able to access sufficient power on favorable terms or at all;
market conditions may result in higher than expected vacancy rates and lower than expected rental rates;
we may incur impairment losses or other charges related to acquired assets or properties;
we may face challenges in retaining the customers of acquired properties; and
we may incur significant costs associated with unrealized transactions.
Many of these risks will be outside of our control and any one of them could result in increased costs, decreases in the amount of
expected revenue, and diversion of our management's time and energy, which could adversely affect our business, financial
condition and results of operations. In addition, even if we successfully operate acquired properties, we may not realize the full
benefits of the acquisition, including the synergies, operating efficiencies, or sales or growth opportunities that are expected. If
we are unable to successfully acquire, develop and operate data center properties, our ability to grow our business and compete
will be significantly impaired, which could adversely affect our business, financial condition and results of operations.
We face risks with our international acquisitions associated with investing in unfamiliar metropolitan areas.
We have acquired and may continue to acquire properties on a strategic and selective basis in international metropolitan areas that
are new to us. For example, in August 2018, we completed the Zenium acquisition which resulted in our ownership of two facilities
in Frankfurt, a new market to us. When we acquire properties located in new markets, we may face risks associated with a lack
of market knowledge or understanding of the local economy and culture, forging new business relationships in the area and
unfamiliarity with local government and permitting procedures. In addition, due diligence, transaction and structuring costs may
be higher than those we may face in the United States. We work to mitigate such risks through extensive diligence and research
and associations with experienced partners; however, we cannot assure you that all such risks will be eliminated.
Any failure to comply with anti-corruption laws and regulations could have adverse effects on our business.
We are subject to laws concerning our business operations, sales and marketing activities in foreign countries where we conduct
business. For example, we are subject to the U.S. Foreign Corrupt Practices Act, or the FCPA, which generally prohibits companies
and any individuals or entities acting on their behalf from offering or making improper payments or providing benefits to foreign
officials for the purpose of obtaining or keeping business. We are also subject to various other anti-bribery, anti-corruption and
international trade laws in the U.S. and certain foreign countries, such as the U.K. Bribery Act. Our strategic partnership with GDS
is subject to PRC laws and regulations related to anti-corruption, which prohibit bribery of government agencies, state or government
owned or controlled enterprises or entities, of government officials or officials that work for state or government owned enterprises
or entities, as well as bribery of non-government entities or individuals. There is a risk that our employees, business partners and
other third parties could violate these laws, and we could be sanctioned or held liable for actions taken by our employees, business
partners and other third parties with respect to our business. We could incur significant expenses in investigating any potential
violation and could incur severe criminal or civil sanctions and/or fines as a result of violations or settlements regarding such laws.
In addition, any allegations, settlements or violations could materially and adversely impact our reputation and our relationships
with current and future customers, suppliers, employees and business partners.
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If the PRC government deems that the contractual arrangements in relation to the consolidated variable interest entities
of GDS do not comply with PRC regulatory restrictions on foreign investment in the relevant industries, or if these
regulations or the interpretation of existing regulations change in the future, we could fail to realize any benefits from our
investment in and relationship with GDS.
The PRC government regulates telecommunications-related businesses through strict business licensing requirements and other
government regulations. These laws and regulations also include limitations on foreign ownership of PRC companies that engage
in telecommunications-related businesses. Because GDS is a Cayman Islands company, GDS is classified as a foreign enterprise
under PRC laws and regulations, and its wholly owned PRC subsidiaries are foreign-invested enterprises, or FIEs. GDS conducts
its business in China through contractual arrangements with its consolidated variable interest entities, or VIEs, and their
shareholders. These contractual arrangements are intended to provide GDS with effective control over its consolidated VIEs and
enables GDS to receive substantially all of the economic benefits of its consolidated VIEs in consideration for the services provided
by its wholly-owned PRC subsidiaries.
There are substantial uncertainties regarding the interpretation and application of PRC laws and regulations, and there can be no
assurance that the PRC government, such as the Ministry of Industry and Information Technology, or the MIIT, or the Ministry
of Commerce, or the MOFCOM, or other authorities that regulate providers of data center service and other participants in the
telecommunications industry would agree that the corporate structure of GDS or any of the above contractual arrangements comply
with PRC licensing, registration or other regulatory requirements, with existing policies or with requirements or policies that may
be adopted in the future. PRC laws and regulations governing the validity of these contractual arrangements are uncertain and the
relevant government authorities have broad discretion in interpreting these laws and regulations.
If the corporate and contractual structure of GDS is deemed by the MOFCOM or MIIT or other regulators having competent
authority to be illegal, either in whole or in part, GDS may lose control of its consolidated VIEs and have to modify such structure
to comply with regulatory requirements. However, there can be no assurance that GDS could achieve this without material disruption
to its business. Further, if its corporate and contractual structure is found to be in violation of any existing or future PRC laws or
regulations, the relevant regulatory authorities would have broad discretion in dealing with such violations. Furthermore, new
PRC laws, rules and regulations may be introduced to impose additional requirements that may be applicable to the corporate
structure and contractual arrangements of GDS. Occurrence of any of these events could materially and adversely affect the
business, financial condition and results of operations of GDS and, as a result, could materially limit key anticipated benefits from
our investment in and relationship with GDS.
The uncertainty surrounding the United Kingdom’s decision to withdraw from the European Union and around the British
Parliament’s approval of the agreement with the European Union regarding the United Kingdom’s withdrawal from the
European Union may have a negative effect on global economic conditions, financial markets and our business, which
could adversely affect our results of operations.
As a result of the Zenium acquisition, we acquired four data centers located in London, U.K. and Frankfurt, Germany and expanded
our presence in Europe. In June 2016, a majority of voters in the United Kingdom elected to withdraw from the European Union
in a national referendum. Although the referendum was advisory, the British government subsequently negotiated the terms of an
agreement with the European Union regarding the United Kingdom’s relationship with the European Union following its exit from
the European Union. On January 15, 2019, the British Parliament, however, rejected the proposed agreement for the United
Kingdom’s withdrawal from the European Union. As a result, there remains considerable uncertainty around the withdrawal of
the United Kingdom from the European Union. Failure to obtain parliamentary approval of a negotiated withdrawal agreement
would mean that the United Kingdom would leave the European Union on March 29, 2019, possibly with no agreement (commonly
referred to as a “no deal Brexit”).
The referendum and the uncertainty around the British Parliament’s approval of the agreement with the European Union regarding
the United Kingdom’s withdrawal from the European Union has created significant uncertainty about the future relationship
between the United Kingdom and the European Union, and the original referendum has given rise to calls for the governments of
other European Union member states to consider withdrawal. These developments, or the perception that any of them could occur,
have had and may continue to have a material adverse effect on global economic conditions and the stability of global financial
markets, and could significantly reduce global market liquidity and restrict the ability of key market participants to operate in
certain financial markets. Asset valuations, currency exchange rates (primarily the British pound sterling and Euro) and credit
ratings may be especially subject to increased market volatility. Lack of clarity about future United Kingdom laws and regulations
as the United Kingdom determines which European Union laws to replace or replicate in the event of a withdrawal could depress
economic activity and restrict our access to capital in the United Kingdom. If the United Kingdom and the European Union are
unable to negotiate acceptable withdrawal terms or if other European Union member states pursue withdrawal, barrier-free access
between the United Kingdom and other European Union member states or among the European economic area overall could be
diminished or eliminated. Any of these factors may adversely affect our business, financial condition and results of operations.
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Our customers may choose to develop or relocate into new data centers or expand their own existing data centers, which
could result in the loss of one or more key customers or reduce demand for our newly developed data centers.
In the future, our customers may choose to develop or relocate to new data centers or expand or consolidate into their existing
data centers that we do not own. In the event that any of our key customers were to do so, it could result in a loss of business to
us or put pressure on our pricing. If we lose a customer, we cannot provide assurance that we would be able to replace that customer
at a competitive rate or at all, which could adversely affect our business, financial condition and results of operations.
A decrease in the demand for data center space could adversely affect our business, financial condition and results of
operations.
Our portfolio of properties consists primarily of data center space. The adverse effect on our business, financial condition and
results of operations from a decreased demand for data center space would likely be greater than if we owned a portfolio with a
more diversified customer base or less specialized use. Adverse developments in the outsourced data center space industry could
lead to reduced corporate IT spending or reduced demand for outsourced data center space. Changes in industry practice or in
technology, such as server virtualization technology, more efficient or miniaturization of computing or networking devices, or
devices that require higher power densities than today’s devices, could also reduce demand for the physical data center space we
provide or make the customer improvements in our facilities obsolete or in need of significant upgrades to remain viable.
Our properties are not suitable for use other than as data centers, which could make it difficult to sell or reposition them
if we are not able to lease available space.
Our data centers are designed solely to house and run computer servers and related information technology equipment and, therefore,
contain extensive electrical and mechanical systems and infrastructure. As a result, they are not suited for use by customers as
anything other than as data centers and major renovations and expenditures would be required in order for us to re-lease vacant
space for more traditional uses, or for us to sell a property to a buyer for use other than as a data center, which could materially
adversely affect our business, results of operations and financial condition.
We may have difficulty managing our growth.
We have significantly and rapidly expanded the size of our Company. For example, we increased our footprint by 18% from
approximately 5,716,701 NRSF at the end of 2017 to approximately 6,725,700 NRSF by December 31, 2018. We have also
expanded our presence in Europe as a result of the Zenium acquisition. Our growth may significantly strain our management,
operational and financial resources and systems. An inability to manage our growth effectively or the increased strain on our
management, our resources and systems could materially adversely affect our business, financial condition and results of operations.
To fund our growth strategy and refinance our indebtedness, we depend on external sources of capital, which may not be
available to us on commercially reasonable terms or at all.
In order to maintain our qualification as a REIT, we are required under the Code, among other things, to distribute at least 90%
of our REIT taxable income annually, determined without regard to the dividends paid deduction and excluding any net capital
gains. Even if we maintain our qualification as a REIT, we will be subject to U.S. federal income tax at regular corporate rates to
the extent that we distribute less than 100% of our REIT taxable income, determined without regard to the dividends paid deduction
and including any net capital gains, as well as U.S. federal income tax at regular corporate rates for income recognized by our
taxable REIT subsidiaries (each, a TRS). Because of these distribution requirements, we will likely not be able to fund future
capital needs, including any necessary acquisition financing, from operating cash flow. Consequently, we intend to rely on third-
party capital markets sources for debt or equity financing to fund our growth strategy. In addition, we may need third-party capital
markets sources to refinance our indebtedness at maturity. Continued or increased turbulence in the U.S., European and other
international financial markets and economies, tighter credit conditions and increasing interest rates may adversely affect our
ability to replace or renew maturing liabilities on a timely basis, access the capital markets to meet liquidity and capital expenditure
requirements and may result in adverse effects on our business, financial condition and results of operations. As such, we may not
be able to obtain the debt or equity financing on favorable terms or at all. Our access to third-party sources of capital also depends,
in part, on:
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the market’s perception of our growth potential;
our then-current debt levels;
market demand for REIT assets;
our historical and expected future earnings, cash flow and cash distributions;
the market price per share of our common stock; and
our lenders' ability to meet their financing commitments.
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In addition, our ability to access additional capital may be limited by the terms of our then-existing indebtedness which may restrict
our incurrence of additional debt. If we cannot obtain capital when needed, we may not be able to acquire or develop properties
when strategic opportunities arise or refinance our debt at maturity, and we may need to increase our liquidity by disposing of
properties possibly on disadvantageous terms or renewing leases on less favorable terms than we otherwise would, which could
adversely affect our business, financial condition and results of operations.
We have significant indebtedness that involves significant debt service obligations, limits our operational and financial
flexibility, exposes us to interest rate fluctuations and exposes us to the risk of default under our debt obligations.
As of December 31, 2018, we had a total combined indebtedness, including capital lease obligations and lease financing
arrangements, of approximately $2,781.4 million. As of December 31, 2018, we have the ability to borrow up to an additional
approximately $1,549.0 million under our $3.0 Billion Credit Facility, net of outstanding letters of credit of approximately $8.0
million, subject to satisfying certain financial tests. Our $3.0 Billion Credit Facility also contains an accordion feature that, as of
December 31, 2018, allows the operating partnership to request an increase in the total commitment by up to $1,000.0 million.
There are no limits on the amount of indebtedness we may incur other than limits contained in the indentures governing our 2024
Notes and 2027 Notes (each as defined in Note 12, Debt to our audited consolidated financial statements), our $3.0 Billion Credit
Facility or future agreements that we may enter into or as may be set forth in any policy limiting the amount of indebtedness we
may incur adopted by CyrusOne’s board of directors. A substantial level of indebtedness could have adverse consequences for our
business, financial condition and results of operations because it could, among other things:
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require us to dedicate a substantial portion of our cash flow from operations to make principal and interest payments on
our indebtedness, thereby reducing our cash flow available to fund working capital, capital expenditures and other general
corporate purposes, including to make distributions on our common stock as currently contemplated or as necessary to
maintain our qualification as a REIT;
require us to maintain certain debt coverage and other financial metrics at specified levels, thereby reducing our financial
flexibility and, in the event of a failure to comply with such requirements, creating the risk of a material adverse effect
on our ability to fulfill our obligations under our debt and on our business and prospects generally;
make it more difficult for us to satisfy our financial obligations, including borrowings under the $3.0 Billion Credit
Facility;
increase our vulnerability to general adverse economic and industry conditions;
expose us to increases in interest rates for our variable rate debt;
limit our ability to borrow additional funds on favorable terms or at all to expand our business or ease liquidity constraints;
limit our ability to refinance all or a portion of our indebtedness on or before maturity on the same or more favorable
terms or at all;
limit our flexibility in planning for, or reacting to, changes in our business and our industry;
place us at a competitive disadvantage relative to competitors that have less indebtedness;
increase our risk of property losses as the result of foreclosure actions initiated by lenders in the event we should incur
mortgage or other secured debt obligations; and
require us to dispose of one or more of our properties at disadvantageous prices or raise equity that may dilute the value
of our common stock in order to service our indebtedness or to raise funds to pay such indebtedness at maturity.
The agreements governing our indebtedness place significant operational and financial restrictions on us and our
subsidiaries, reducing our operational flexibility and creating default risks.
The agreements governing our indebtedness contain covenants, and the terms of any future agreements may contain covenants,
that place restrictions on us and our subsidiaries. These covenants restrict, among other things, our and our subsidiaries’ ability
to:
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merge, consolidate or transfer all, or substantially all, of our or our subsidiaries’ assets;
incur or guarantee additional debt or issue preferred stock;
make certain investments or acquisitions;
create liens on our or our subsidiaries’ assets;
sell assets;
make capital expenditures;
incur restrictions on the payment of dividends or other distributions from our restricted subsidiaries;
make distributions on or repurchase our stock;
enter into transactions with affiliates;
issue or sell stock of our subsidiaries; and
change the nature of our business.
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These covenants could impair our ability to grow our business, take advantage of attractive business opportunities or successfully
compete. These covenants could also impair our ability to plan for or react to market conditions or meet capital needs, or our
ability to finance our operations, strategic acquisitions, investments or alliances or other capital needs or to engage in other business
activities that would be in our interest. In addition, the indentures governing our 2024 Notes and 2027 Notes and our $3.0 Billion
Credit Facility require us to maintain specified financial ratios and satisfy financial condition tests. The indentures governing our
2024 Notes and 2027 Notes also require our operating partnership and its subsidiaries to maintain total unencumbered assets of
at least 150% of the aggregate principal amount of their outstanding unsecured debt on a consolidated basis. Our ability to comply
with these metrics or tests may be affected by events beyond our control, including prevailing economic, financial and industry
conditions. A breach of any of these covenants or covenants under any other agreements governing our indebtedness could result
in an event of default. Cross-default provisions in our debt agreements could cause an event of default under one debt agreement
to trigger an event of default under our other debt agreements. Upon the occurrence of an event of default under any of our debt
agreements, the lenders or holders thereof could elect to declare all outstanding debt under such agreements to be immediately
due and payable. If we were unable to repay or refinance the accelerated debt, the lenders or holders, as applicable, could proceed
against any assets pledged to secure that debt, including foreclosing on or requiring the sale of our data centers, and our assets
may not be sufficient to repay such debt in full.
We may become subject to litigation or threatened litigation which may divert management time and attention, require us
to pay damages and expenses or restrict the operation of our business.
We may become subject to disputes with commercial parties with whom we maintain relationships or other parties with whom
we do business, including as a result of any breach in our security systems or downtime in our critical electrical and cooling
systems. Any such dispute could result in litigation between us and the other parties. Whether or not any dispute actually proceeds
to litigation, we may be required to devote significant management time and attention to its resolution (through litigation, settlement
or otherwise), which would detract from our management’s ability to focus on our business. Any such resolution could involve
the payment of damages or expenses by us, which may be significant. In addition, any such resolution could involve our agreement
with terms that restrict the operation of our business.
We could incur significant costs related to environmental matters.
We are subject to laws and regulations relating to the protection of the environment, including those governing the management
and disposal of hazardous materials, the cleanup of contaminated sites and health and safety matters. We could incur significant
costs, including fines, penalties and other sanctions, cleanup costs and third-party claims for property damages or personal injuries,
as a result of violations of or liabilities under environmental laws and regulations. Some environmental laws impose liability on
current owners or operators of property regardless of fault or the lawfulness of past disposal activities. For example, many of our
sites contain above ground fuel storage tanks and, in some cases, currently contain or formerly contained underground fuel storage
tanks, for back-up generator use. Some of our sites also have a history of previous commercial operations. We also may acquire
or develop sites in the future with unknown environmental conditions from historical operations. Although we are not aware of
any sites at which we currently have material remedial obligations, the imposition of remedial obligations as a result of spills or
the discovery of contaminants in the future could result in significant additional costs. We also could incur significant costs
complying with current environmental laws or regulations or those that are promulgated in the future.
We may incur significant costs complying with the Americans with Disabilities Act, or ADA, and similar laws, which could
materially adversely affect our financial condition and operating results.
Under the ADA, all places of public accommodation must meet federal requirements related to access and use by disabled persons.
A number of additional federal, state and local laws may also require modifications to our properties. We have not conducted an
audit or investigation of all of our properties to determine our compliance with the ADA. If one of our properties is not in compliance
with the ADA, we would be required to incur additional costs to bring the property into compliance. Additional federal, state and
local laws may require modifications to our properties, or restrict our ability to renovate our properties. We cannot predict the
ultimate amount of the cost of compliance with the ADA or other legislation. If we incur substantial costs to comply with the ADA
and any other similar legislation, our financial condition and results of operations could be materially adversely affected.
We may be adversely affected by regulations related to climate change.
If we, or other companies with which we do business, become subject to existing or future laws and regulations related to climate
change, our business could be impacted adversely. For example, in the normal course of business, we enter into agreements with
providers of electric power for our data centers, and the costs of electric power comprise a significant component of our operating
expenses. Changes in regulations that affect electric power providers, such as regulations related to the control of greenhouse gas
emissions or other climate change related matters, could adversely affect the costs of electric power and increase our operating
costs and may adversely affect our business, financial condition and results of operations or those of our customers.
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We may incur significant costs complying with other regulations.
Our properties are subject to various federal, state and local regulations, such as state and local fire and life safety regulations, as
well as similar foreign regulations. For instance, as discussed in “We may be vulnerable to security breaches or cyber-attacks
which could disrupt our operations and have a material adverse effect on our financial performance and operating results”
above, new regulations such as the GDPR may have significant impact on our operations. If we fail to comply with these various
regulations, we may be required to pay fines or private damage awards. We do not know whether existing regulations will change
or whether future regulations will require us to make significant unanticipated expenditures that may adversely affect our business,
financial condition and results of operations. With respect to foreign regulations, we also face the risks described above in “We
face risks with our international acquisitions associated with investing in unfamiliar metropolitan areas”.
We may be subject to unknown or contingent liabilities related to properties or businesses that we acquire for which we
may have limited or no recourse against the sellers.
Assets and entities that we have acquired or may acquire in the future, including the properties contributed to us by Cincinnati
Bell Inc. (CBI), our former parent, may be subject to unknown or contingent liabilities for which we may have limited or no
recourse against the sellers. Unknown or contingent liabilities might include liabilities for clean-up or remediation of environmental
conditions, claims of customers, vendors or other persons dealing with the acquired entities, tax liabilities and other liabilities
whether incurred in the ordinary course of business or otherwise. In the future, we may enter into transactions with limited
representations and warranties or with representations and warranties that do not survive the closing of the transactions, in which
event we would have no or limited recourse against the sellers of such properties. While we usually require the sellers to indemnify
us with respect to breaches of representations and warranties that survive, such indemnification, if obtained, is often limited and
subject to various materiality thresholds, a significant deductible, an aggregate cap on losses or a survival period.
As a result, there is no guarantee that we will recover any amounts with respect to losses due to breaches by the sellers of their
representations and warranties. In addition, the total amount of costs and expenses that we may incur with respect to liabilities
associated with acquired properties and entities may exceed our expectations, which may adversely affect our business, financial
condition and results of operations. Finally, indemnification agreements between us and the sellers typically provide that the sellers
will retain certain specified liabilities relating to the assets and entities acquired by us. While the sellers are generally contractually
obligated to pay all losses and other expenses relating to such retained liabilities, there can be no guarantee that such arrangements
will not require us to incur losses or other expenses as well.
The failure to successfully implement changes to our information technology system could adversely affect our business.
From time to time, we make changes to our information technology system to meet our business and financial reporting needs.
Transitioning to new or upgraded systems can create difficulties, including potential disruption to our financial reporting data,
security vulnerabilities and decreases in productivity until personnel become familiar with new systems. In addition, our
management information systems will require modification and refinement as we grow and as our business needs change, which
could prolong difficulties we experience with systems transitions, and we may not always employ the most effective systems for
our purposes. If we experience difficulties in implementing new or upgraded information systems or experience significant system
failures, or if we are unable to successfully modify our management information systems and respond to changes in our business
needs, our operating results could be harmed or we may fail to meet our reporting obligations.
We face significant competition and may be unable to lease vacant space, renew existing leases or re-lease space as leases
expire, which may adversely affect our business, financial condition and results of operations.
We compete with numerous developers, owners and operators of technology-related real estate and data centers, many of which
own properties similar to ours in the same markets, as well as various other public and privately held companies that may provide
data center colocation as part of a more expansive managed services offering, and local developers. In addition, we may face
competition from new entrants into the data center market. Some of our competitors may have significant advantages over us,
including greater name recognition, longer operating histories, lower operating costs, pre-existing relationships with current or
potential customers, greater financial, marketing and other resources, access to less expensive power and access to attractive land
for development. These advantages could allow our competitors to respond more quickly to strategic opportunities or changes in
our industries or markets. If our competitors offer data center space that our existing or potential customers perceive to be superior
to ours based on numerous factors, including power, security considerations, location or network connectivity, or if they offer
rental rates below our or current market rates, we may lose existing or potential customers, incur costs to improve our properties
or be forced to reduce our rental rates.
Some of our competitors may adopt aggressive pricing policies, especially if they are not highly leveraged or have lower return
thresholds than we do. As a result, we may suffer from pricing pressure that would adversely affect our ability to generate revenues.
Some of these competitors may also provide our target customers with additional benefits, including bundled communication
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services or cloud services, and may do so in a manner that is more attractive to our potential customers than obtaining space in
our data centers. Competitors could also operate more successfully or form alliances to acquire significant market share.
Finally, as our customers evolve their IT strategies, we must remain flexible and evolve along with industry and market shifts.
Ineffective planning and execution in our cloud strategy and product development lifecycle may cause difficulty in sustaining
competitive advantage in our products and services.
Future joint venture investments could be adversely affected by our lack of sole decision-making authority, our reliance
on co-venturers’ financial condition and disputes between us and our co-venturers.
We may in the future co-invest with third parties through partnerships, joint ventures or other entities, acquiring non-controlling
interests in or sharing responsibility for managing the affairs of a property, partnership, joint venture or other entity. In these events,
we would not be in a position to exercise sole decision-making authority regarding the property, partnership, joint venture or other
entity. Investments in partnerships, joint ventures, or other entities may, under certain circumstances, involve risks not present
when a third party is not involved, including the possibility that partners or co-venturers might become bankrupt or fail to fund
their share of required capital contributions. Partners or co-venturers may have economic, tax or other business interests or goals
which are inconsistent with our business interests or goals, and may be in a position to take actions contrary to our policies or
objectives. Our future joint venture partners may take actions that are not within our control, which would require us to dispose
of the joint venture asset or transfer it to a taxable REIT subsidiary in order for CyrusOne Inc. to maintain its status as a REIT.
Such investments may also lead to impasses, for example, as to whether to sell a property, because neither we nor the partner or
co-venturer would have full control over the partnership or joint venture. Disputes between us and future partners or co-venturers
may result in litigation or arbitration that would increase our expenses and prevent our officers and/or directors from focusing
their time and effort on our day-to-day business. Consequently, actions by or disputes with partners or co-venturers may subject
properties owned by the partnership or joint venture to additional risk. In addition, we may in certain circumstances be liable for
the actions of future third-party partners or co-venturers. Each of these factors may result in returns on these investments being
less than we expect or in losses and our financial and operating results may be adversely affected.
The loss of any of our key personnel, including our executive officers or key sales associates, could adversely affect our
business, financial condition and results of operations.
Our success will continue to depend to a significant extent on our executive officers and key sales associates. Each of our executive
officers has a national or regional industry reputation that attracts business and investment opportunities and assists us in negotiations
with lenders, existing and potential customers and industry personnel. The loss of key sales associates could hinder our ability to
continue to benefit from existing and potential customers. We cannot provide any assurance that we will be able to retain our
current executive officers or key sales associates. The loss of any of these individuals could adversely affect our business, financial
condition and results of operations.
Our data center infrastructure may become obsolete, and we may not be able to upgrade our power and cooling systems
cost-effectively, or at all.
The markets for the data centers we own and operate, as well as the industries in which our customers operate, are characterized
by rapidly changing technology, evolving industry standards, frequent new service introductions, shifting distribution channels
and changing customer demands. Our data center infrastructure may become obsolete due to the development of new systems to
deliver power to or eliminate heat from the servers that we house. Additionally, our data center infrastructure could become obsolete
as a result of the development of new server technology that does not require the levels of critical load and heat removal that our
facilities are designed to provide and could be run less expensively on a different platform. In addition, our power and cooling
systems are difficult and expensive to upgrade. Accordingly, we may not be able to efficiently upgrade or change these systems
to meet new demands without incurring significant costs that we may not be able to pass on to our customers. The obsolescence
of our power and cooling systems could have a material negative impact on our business, financial condition and results of
operations. Furthermore, potential future regulations that apply to industries we serve may require customers in those industries
to seek specific requirements from their data centers that we are unable to provide. These may include physical security requirements
applicable to the defense industry and government contractors and privacy and security regulations applicable to the financial
services and health care industries. If such regulations were adopted, we could lose some customers or be unable to attract new
customers in certain industries, which would have a material adverse effect on our results of operations.
Declining real estate valuations and impairment charges could adversely affect our earnings and financial condition.
We review the carrying value of each of our properties when events or changes in circumstances indicate that the carrying amount
of the property may not be recoverable. Examples of such indicators may include a significant decrease in market price, a significant
adverse change in the extent to or manner in which the property is being used or in its physical condition, an accumulation of costs
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significantly in excess of the amount originally expected for the acquisition or development, or a history of operating or cash flow
losses. When such impairment indicators exist, we review an estimate of the future undiscounted net cash flows (excluding interest
charges) expected to result from the real estate investment’s use and eventual disposition and compare it to the carrying value of
the property. We consider factors such as future operating income, trends and prospects, as well as the effects of leasing demand,
competition and other factors. If our future undiscounted net cash flow evaluation indicates that we are unable to recover the
carrying value of a real estate investment, an impairment loss is recorded to the extent that the carrying value exceeds the estimated
fair value of the property. For example, we recorded an impairment of $58.0 million related primarily to two properties for the
year ended December 31, 2017. These losses have a direct impact on our net income because recording an impairment loss results
in an immediate negative adjustment to net income. The evaluation of anticipated cash flows is highly subjective and is based in
part on assumptions regarding future occupancy, rental rates and capital requirements that could differ materially from actual
results in future periods. A worsening real estate market may cause us to re-evaluate the assumptions used in our impairment
analysis. Impairment charges could adversely affect our business, financial condition and results of operations.
Our contracts with our customers may adversely affect our earnings and financial condition.
In the ordinary course of business, we enter into agreements with our customers pursuant to which our customers lease or otherwise
contract for the use of data center space from us. These contracts typically contain indemnification and liability provisions, in
addition to service level commitments, which could potentially impose a significant cost on us in the event of losses arising out
of certain breaches of such agreements, services to be provided by us or our subcontractors or from third-party claims. Customers
increasingly are looking to pass through their regulatory obligations and other liabilities to their outsourced data center providers
and we may not be able to limit our liability or damages in an event of loss suffered by such customers whether as a result of our
breach of agreement or otherwise. Further, liabilities and standards for damages and enforcement actions, including the regulatory
framework applicable to different types of losses, vary by jurisdiction, and we may be subject to greater liability for certain losses
in certain jurisdictions. Additionally, in connection with our acquisitions, we have assumed and expect to assume existing
agreements with customers that may subject us to greater liability for such an event of loss. If such an event of loss occurred, we
could be liable for material monetary damages and could incur significant legal fees in defending against such an action, which
could adversely affect our financial condition and results of operations.
Any failure of the National IX Platform could lead to significant costs and disruptions that could reduce our revenue and
harm our business reputation and financial results.
As described in Part I, Item 1 "Business", we have deployed the National IX Platform throughout several of our properties, and
expect that we will further deploy it throughout our portfolio to meet customer demand. The National IX Platform allows our
customers to connect to third-party carriers and other customers. We may be required to incur substantial additional costs to operate
and expand the National IX Platform. The National IX Platform is subject to failure resulting from numerous factors, including
but not limited to:
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human error;
equipment failure;
physical, electronic, and cyber-security breaches;
fire, earthquake, hurricane, flood, tornado and other natural disasters in our facilities;
failure to properly connect to third-party carriers or other customers;
fiber cuts;
power loss;
terrorist acts;
sabotage and vandalism; and
failure of business partners who provide components of the National IX Platform or third-party connectivity from the
National IX Platform.
Problems with the National IX Platform, whether or not within our control, could result in service interruptions or significant
equipment damage. We have service level commitment obligations to certain of our customers, including our significant customers.
As a result, service interruptions in the National IX Platform could result in difficulty maintaining service level commitments to
these customers and in potential claims related to such failures. In addition, any loss of service, equipment damage or inability to
meet our service level commitment obligations could reduce the confidence of our customers and could consequently impair our
ability to obtain and retain customers, which would adversely affect both our ability to generate revenues and our operating results.
Violations of our prohibition on harassment, sexual or otherwise, could result in liabilities and/or litigation.
We prohibit harassment or discrimination in the workplace, whether sexual harassment or any other form. This policy applies to
all aspects of employment. Notwithstanding our conducting training and taking disciplinary action against alleged violations, we
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may encounter additional costs from claims made and/or legal proceedings brought against us. Any such claims or allegations, or
even just stories or rumors about such misconduct at the Company, could also harm our reputation and therefore our business,
including our ability to recruit future employees or secure contracts with new customers, even if such allegations do not result in
any legal liability or direct financial losses.
The expansion of social media platforms presents new risks and challenges.
The inappropriate use of certain social media vehicles could cause brand damage or information leakage or could lead to legal
implications from the improper collection and/or dissemination of personally identifiable information or the improper dissemination
of material non-public information. In addition, negative posts or comments about us on any social networking web site could
seriously damage our reputation. Further, the disclosure of non-public company sensitive information through external media
channels could lead to information loss as there might not be structured processes in place to secure and protect information. If
our non-public sensitive information is disclosed or if our reputation is seriously damaged through social media, it could have a
material adverse effect on our business, financial condition, results of operations, cash flows, and/or ordinary share price.
Risks Related to the Real Estate Industry
Our performance and value are subject to risks associated with real estate assets and with the real estate industry.
Our ability to make expected distributions to our stockholders depends on our ability to generate revenues in excess of expenses,
scheduled principal payments on debt and capital expenditure requirements. Events and conditions generally applicable to owners
and operators of real property that are beyond our control may decrease cash available for distribution to our stockholders and the
value of our properties. These events include:
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local oversupply, increased competition or reduction in demand for technology-related space;
inability to collect rent from customers;
vacancies or our inability to rent space on favorable terms;
inability to finance property development and acquisitions on favorable terms;
increased operating costs to the extent not paid for by our customers;
costs of complying with changes in governmental regulations;
the relative illiquidity of real estate investments, especially the specialized real estate properties that we hold and seek to
acquire and develop; and
changing market demographics.
Illiquidity of real estate investments, particularly our data centers, could significantly impede our ability to respond to
adverse changes in the performance of our properties, which could harm our financial condition.
Because real estate investments are relatively illiquid, our ability to promptly sell one or more properties in our portfolio in response
to adverse changes in the real estate market or in the performance of such properties may be limited, thus harming our financial
condition. The real estate market is affected by many factors that are beyond our control, including:
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adverse changes in national and local economic and market conditions;
changes in interest rates and in the availability, cost and terms of debt financing;
changes in governmental laws and regulations, fiscal policies and zoning ordinances and costs of compliance therewith;
the ongoing cost of capital improvements that are not passed on to our customers, particularly in older structures;
changes in operating expenses; and
civil unrest, acts of war, terrorism and natural disasters, including fires, earthquakes, tropical storms, hurricanes, and
floods, which may result in uninsured and underinsured losses.
The risks associated with the illiquidity of real estate investments are even greater for our data center properties. Our data centers
are highly specialized real estate assets containing extensive electrical and mechanical systems that are uniquely designed to house
and maintain our customers’ equipment, and, as such, have little, if any, traditional office space. As a result, most of our data
centers are not suited for use by customers as anything other than as data centers and major renovations and expenditures would
be required in order for us to re-lease data center space for more traditional commercial or industrial uses, or for us to sell a property
to a buyer for use other than as a data center. Further, we operate a branded platform-based business that would not easily be
separated on an asset by asset basis.
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Risks Related to Our Organizational Structure
Our rights and the rights of our stockholders to take action against our directors and officers are limited.
Maryland law provides that a director has no liability in the capacity as a director if he or she performs his or her duties in good
faith, in a manner he or she reasonably believes to be in the company’s best interests and with the care that an ordinarily prudent
person in a like position would use under similar circumstances. As permitted by the Maryland General Corporation Law (MGCL),
our charter limits the liability of our directors and officers to the company and our stockholders for money damages, except for
liability resulting from:
•
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actual receipt of an improper benefit or profit in money, property or services; or
a final judgment based upon a finding of active and deliberate dishonesty by the director or officer that was material to
the cause of action adjudicated.
In addition, our charter authorizes us to obligate the company, and our bylaws require us, to indemnify our directors and officers
for actions taken by them in those capacities and to pay or reimburse their reasonable expenses in advance of final disposition of
a proceeding to the maximum extent permitted by Maryland law, and we have entered into indemnification agreements with our
directors and executive officers. As a result, we and our stockholders may have more limited rights against our directors and
officers than might otherwise exist under common law. Accordingly, in the event that any of our directors or officers are exculpated
from, or indemnified against, liability but whose actions impede our performance, our stockholders’ ability to recover damages
from that director or officer will be limited.
Conflicts of interest exist or could arise in the future with our operating partnership or its partners.
Conflicts of interest exist or could arise in the future as a result of the relationships between us and our affiliates, on the one hand,
and our operating partnership or any partner thereof, on the other. Our directors and officers have duties to our company under
applicable Maryland law in connection with their direction of the management of our company. At the same time, we, as trustee,
have duties to CyrusOne GP, which, in turn, as general partner of our operating partnership, has duties to our operating partnership
and to the limited partners under Maryland law in connection with the management of our operating partnership. Under Maryland
law, the general partner of a Maryland limited partnership has fiduciary duties of care and loyalty, and an obligation of good faith,
to the partnership and its partners. While these duties and obligations cannot be eliminated entirely in the limited partnership
agreement, Maryland law permits the parties to a limited partnership agreement to specify certain types or categories of activities
that do not violate the general partner’s duty of loyalty and to modify the duty of care and obligation of good faith, so long as such
modifications are not unreasonable. These duties as general partner of our operating partnership to the partnership and its partners
may come into conflict with the interests of our company. Under the partnership agreement of our operating partnership, the limited
partners of our operating partnership expressly agree that the general partner of our operating partnership is acting for the benefit
of the operating partnership, the limited partners of our operating partnership and our stockholders, collectively. The general partner
is under no obligation to give priority to the separate interests of the limited partners in deciding whether to cause our operating
partnership to take or decline to take any actions. If there is a conflict between the interests of us or our stockholders, on the one
hand, and the interests of the limited partners of our operating partnership, on the other, the partnership agreement of our operating
partnership provides that any action or failure to act by the general partner that gives priority to the separate interests of us or our
stockholders that does not result in a violation of the contractual rights of the limited partners of our operating partnership under
the partnership agreement will not violate the duties that the general partner owes to our operating partnership and its partners.
Additionally, the partnership agreement of our operating partnership expressly limits our liability by providing that we and our
directors, officers, agents and employees will not be liable or accountable to our operating partnership or its partners for money
damages. In addition, our operating partnership is required to indemnify us, our directors, officers and employees, the general
partner and its trustees, officers and employees, employees of our operating partnership and any other persons whom the general
partner may designate from and against any and all claims arising from operations of our operating partnership in which any
indemnitee may be involved, or is threatened to be involved, as a party or otherwise unless it is established by a final judgment
that the act or omission of the indemnitee constituted fraud, intentional harm or gross negligence on the part of the indemnitee,
the claim is brought by the indemnitee (other than to enforce the indemnitee’s rights to indemnification or advance of expenses)
or the indemnitee is found to be liable to our operating partnership, and then only with respect to each such claim.
No reported decision of a Maryland appellate court has interpreted provisions that are similar to the provisions of the partnership
agreement of our operating partnership that modify the fiduciary duties of the general partner of our operating partnership, and
we have not obtained an opinion of counsel regarding the enforceability of the provisions of the partnership agreement that purport
to waive or modify the fiduciary duties and obligations of the general partner of our operating partnership.
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Our charter and bylaws and the partnership agreement of our operating partnership contain provisions that may delay,
defer or prevent an acquisition of our common stock or a change in control.
Our charter and bylaws contain a number of provisions, the exercise or existence of which could delay, defer or prevent a transaction
or a change in control that might involve a premium price for our stockholders or otherwise be in their best interests, including
the following:
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Our Charter Contains Restrictions on the Ownership and Transfer of Our Stock. In order for us to qualify as a REIT,
no more than 50% of the value of outstanding shares of our stock may be owned, beneficially or constructively, by five
or fewer individuals at any time during the last half of each taxable year other than the first year for which we elect to be
taxed as a REIT. Subject to certain exceptions, our charter prohibits any stockholder from owning beneficially or
constructively more than 9.8% in value or in number of shares, whichever is more restrictive, of the outstanding shares
of our common stock, or 9.8% in value of the aggregate of the outstanding shares of all classes or series of our stock. We
refer to these restrictions collectively as the “ownership limits.” The constructive ownership rules under the Code are
complex and may cause the outstanding stock owned by a group of related individuals or entities to be deemed to be
constructively owned by one individual or entity. As a result, the acquisition of less than 9.8% of our outstanding common
stock or the outstanding shares of all classes or series of our stock by an individual or entity could cause that individual
or entity or another individual or entity to own constructively in excess of the relevant ownership limits. Our charter also
prohibits any person from owning shares of our stock that would result in our being “closely held” under Section 856(h)
of the Code or otherwise cause us to fail to qualify as a REIT. Any attempt to own or transfer shares of our common stock
or of any of our other capital stock in violation of these restrictions may result in the shares being automatically transferred
to a charitable trust or may be void. These ownership limits may prevent a third-party from acquiring control of us if our
board of directors does not grant an exemption from the ownership limits, even if our stockholders believe the change in
control is in their best interests. Although it is under no continuing obligation to do so, our board of directors has granted
some limited exemptions from the ownership limits applicable to other holders of our common stock, subject to certain
initial and ongoing conditions designed to protect our status as a REIT, including, if deemed advisable, the receipt of an
Internal Revenue Service (IRS) private letter ruling or an opinion of counsel.
Our Board of Directors Has the Power to Cause Us to Issue Additional Shares of Our Stock Without Stockholder
Approval. Our charter authorizes us to issue additional authorized but unissued shares of common or preferred stock. In
addition, our board of directors may, without stockholder approval, amend our charter to increase the aggregate number
of our shares of stock or the number of shares of stock of any class or series that we have authority to issue and classify
or reclassify any unissued shares of common or preferred stock and set the preferences, rights and other terms of the
classified or reclassified shares. As a result, our board of directors may establish a series of shares of common or preferred
stock that could delay or prevent a transaction or a change in control that might involve a premium price for our shares
of common stock or otherwise be in the best interests of our stockholders.
Certain provisions of Maryland law may limit the ability of a third-party to acquire control of us.
Certain provisions of the MGCL may have the effect of inhibiting a third-party from acquiring us or of impeding a change of
control under circumstances that otherwise could provide our common stockholders with the opportunity to realize a premium
over the then-prevailing market price of such shares, including:
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“business combination” provisions that, subject to limitations, prohibit certain business combinations between an
“interested stockholder” (defined generally as any person who beneficially owns 10% or more of the voting power of
our outstanding shares of voting stock or an affiliate or associate of the corporation who, at any time within the two-year
period immediately prior to the date in question, was the beneficial owner of 10% or more of the voting power of the
then outstanding stock of the corporation) or an affiliate of any interested stockholder and us for five years after the most
recent date on which the stockholder becomes an interested stockholder, and thereafter imposes two super-majority
stockholder voting requirements on these combinations; and
“control share” provisions that provide that holders of “control shares” of our company (defined as voting shares of
stock that, if aggregated with all other shares of stock owned or controlled by the acquirer, would entitle the acquirer to
exercise one of three increasing ranges of voting power in electing directors) acquired in a “control share
acquisition” (defined as the direct or indirect acquisition of issued and outstanding “control shares”) have no voting rights
except to the extent approved by our stockholders by the affirmative vote of at least two-thirds of all of the votes entitled
to be cast on the matter, excluding all interested shares.
Pursuant to the Maryland Business Combination Act, our board of directors has by resolution exempted from the provisions of
the Maryland Business Combination Act business combinations between any other person and us, provided that such business
combination is first approved by our board of directors (including a majority of our directors who are not affiliates or associates
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of such person). Our bylaws contain a provision exempting from the Maryland Control Share Acquisition Act any and all acquisitions
by any person of shares of our stock. There can be no assurance that these exemptions or resolutions will not be amended or
eliminated at any time in the future.
Additionally, Title 3, Subtitle 8 of the MGCL permits our board of directors, without stockholder approval and regardless of what
is currently provided in our charter or bylaws, to implement certain takeover defenses, such as a classified board, some of which
we do not have.
Our bylaws designate the Circuit Court for Baltimore City, Maryland, as the sole and exclusive forum for certain types of
actions and proceedings that may be initiated by our stockholders, which could limit our stockholders’ ability to bring a
claim in a judicial forum that the stockholders believe is a more favorable judicial forum for disputes with us or our
directors, officers or other employees.
Our bylaws provide that, subject to limited exceptions, the Circuit Court for Baltimore City, Maryland, is the sole and exclusive
forum for (a) any derivative action or proceeding brought on our behalf, (b) any action asserting a claim of breach of any duty
owed by any of our directors, officers or other employees to us or our stockholders, (c) any action asserting a claim against us or
any of our directors, officers or other employees arising pursuant to any provision of the MGCL, our charter or our bylaws or (d)
any action asserting a claim against us or any of our directors, officers or other employees that is governed by the internal affairs
doctrine. This provision may limit a stockholder’s ability to bring a claim in a judicial forum that it believes is more favorable for
disputes against us or our directors, officers or employees, which may discourage such lawsuits against us and our directors,
officers and other employees.
Risks Related to Status as a REIT
If we fail to remain qualified as a REIT, we will be subject to U.S. federal income tax as a regular corporation and could
face a substantial tax liability, which would reduce the amount of cash available for distribution to our stockholders.
CyrusOne Inc. has elected to be taxed as a REIT under the Code commencing with our initial taxable year ending December 31,
2013. We intend to continue to operate in a manner that will allow us to remain qualified as a REIT. Our qualification as a REIT
depends on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership and other requirements
on a continuing basis. Our ability to satisfy the asset tests depends upon our analysis of the characterization and fair market values
of our assets, some of which are not susceptible to a precise determination, and for which we do not obtain independent appraisals.
We have received a private letter ruling from the IRS with respect to certain issues relevant to our qualification as a REIT. In
general, the ruling provides, subject to the terms and conditions contained therein, that certain structural components of our
properties (e.g., relating to the provision of electricity, heating, ventilation and air conditioning, regulation of humidity, security
and fire protection, and telecommunications services) and intangible assets, and certain services that we may provide, directly or
through subsidiaries, to our tenants, will not adversely affect our qualification as a REIT. Although we may generally rely upon
the ruling, no assurance can be given that the IRS will not challenge our qualification as a REIT on the basis of other issues or
facts outside the scope of the ruling.
If we were to fail to qualify as a REIT in any taxable year, we would be subject to U.S. federal income tax, and could be subject
to U.S. Federal income tax for any open taxable years beginning prior to January 1, 2019 including any applicable alternative
minimum tax, on our taxable income at regular corporate rates, and dividends paid to our stockholders would not be deductible
by us in computing our taxable income. Any resulting corporate tax liability could be substantial and would reduce the amount of
cash available for distribution to our stockholders, which in turn could have an adverse impact on the value of our common stock.
Unless we were entitled to relief under certain Code provisions, we would also be disqualified from re-electing to be taxed as a
REIT for the four taxable years following the year in which we failed to qualify as a REIT.
Qualifying as a REIT involves highly technical and complex provisions of the Code.
Qualification as a REIT involves the application of highly technical and complex Code provisions for which only limited judicial
and administrative authorities exist. Even a technical or inadvertent violation could jeopardize our REIT qualification. Our continued
qualification as a REIT will depend on our satisfaction of certain asset, income, organizational, distribution, stockholder ownership
and other requirements on a continuing basis. In addition, our ability to satisfy the requirements to qualify as a REIT may depend
in part on the actions of third parties over which we have no control or only limited influence, including in cases where we own
an equity interest in an entity that is classified as a partnership for U.S. federal income tax purposes.
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Dividends payable by REITs generally do not qualify for the reduced tax rates available for some dividends, but certain
stockholders may be entitled to deduct up to 20% of dividends payable by REITs.
"Qualified dividend income" payable to U.S. stockholders that are individuals, trusts or estates is generally subject to tax at
preferential rates, but dividends payable by REITs generally do not constitute “qualified dividend income”. For taxable years
beginning after December 31, 2017 and before January 1, 2026, however, U.S. stockholders that are individuals, trusts or estates
generally will be entitled to deduct up to 20% of “qualified REIT dividends”. A “qualified REIT dividend” is any dividend from
a REIT received during the taxable year that is not designated by the REIT as a “capital gain dividend” or as “qualified dividend
income”.
REIT distribution requirements could adversely affect our ability to execute our business plan.
We generally must distribute annually at least 90% of our REIT taxable income, determined without regard to the dividends paid
deduction and excluding any net capital gains, in order for us to qualify as a REIT (assuming that certain other requirements are
also satisfied) so that U.S. federal corporate income tax does not apply to earnings that we distribute. To the extent that we satisfy
this distribution requirement and qualify for taxation as a REIT but distribute less than 100% of our REIT taxable income, determined
without regard to the dividends paid deduction and including any net capital gains, we will be subject to U.S. federal corporate
income tax on our undistributed net taxable income. In addition, we will be subject to a 4% nondeductible excise tax if the actual
amount that we distribute to our stockholders in a calendar year is less than a minimum amount specified under U.S. federal tax
laws. We intend to make distributions to our stockholders to comply with the REIT requirements of the Code.
From time to time, we may generate taxable income greater than our cash flow as a result of differences in timing between the
recognition of taxable income and the actual receipt of cash or the effect of nondeductible capital expenditures, the creation of
reserves or required debt or amortization payments. If we do not have other funds available in these situations, we could be required
to borrow funds on unfavorable terms, sell assets at disadvantageous prices or distribute amounts that would otherwise be invested
in future acquisitions to make distributions sufficient to enable us to pay out enough of our taxable income to satisfy the REIT
distribution requirement and to avoid corporate income tax and the 4% excise tax in a particular year. These alternatives could
increase our costs or reduce our equity. Thus, compliance with the REIT requirements may hinder our ability to grow, which could
adversely affect the value of our common stock.
Even if we remain qualified as a REIT, we may face other tax liabilities that reduce our cash flow.
Even if we remain qualified for taxation as a REIT, we may be subject to certain U.S. federal, state and local taxes on our income
and assets, including taxes on any undistributed income and state or local income, property and transfer taxes. For example, in
order to meet the REIT qualification requirements, we may hold some of our assets or conduct certain of our activities through
one or more TRS or other subsidiary corporations that will be subject to federal, state, and local corporate-level income taxes as
regular C corporations. In addition, we may incur a 100% excise tax on transactions with a TRS if they are not conducted on an
arm’s length basis. Any of these taxes would decrease cash available for distribution to our stockholders.
Complying with REIT requirements may cause us to forgo otherwise attractive opportunities.
To qualify as a REIT, we must ensure that, at the end of each calendar quarter, at least 75% of the value of our assets consists of
cash, cash items, government securities and “real estate assets” (as defined in the Code), including certain mortgage loans and
securities. The remainder of our investments (other than government securities, qualified real estate assets and securities issued
by a TRS) generally cannot include more than 10% of the outstanding voting securities of any one issuer or more than 10% of the
total value of the outstanding securities of any one issuer. In addition, in general, no more than 5% of the value of our total assets
(other than government securities, qualified real estate assets and securities issued by a TRS) can consist of the securities of any
one issuer, and no more than 20% of the value of our total assets can be represented by securities of one or more TRS. If we fail
to comply with these requirements at the end of any calendar quarter, we must correct the failure within 30 days after the end of
the calendar quarter or qualify for certain statutory relief provisions to avoid losing our REIT qualification and suffering adverse
tax consequences. As a result, we may be required to liquidate or forgo otherwise attractive investments. These actions could have
the effect of reducing our income and amounts available for distribution to our stockholders.
In addition to the asset tests set forth above, to continue to qualify as a REIT we must continually satisfy tests concerning, among
other things, the sources of our income, the amounts we distribute to our stockholders and the ownership of our stock. We may
be unable to pursue investments that would be otherwise advantageous to us in order to satisfy the source-of-income or asset-
diversification requirements for qualifying as a REIT. Thus, compliance with the REIT requirements may hinder our ability to
make certain attractive investments.
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Complying with REIT requirements may limit our ability to hedge effectively and may cause us to incur tax liabilities.
The REIT provisions of the Code substantially limit our ability to hedge our assets and liabilities. Any income from a hedging
transaction that we enter into to manage risk of interest rate changes with respect to borrowings made or to be made to acquire or
carry real estate assets does not constitute “gross income” for purposes of the 75% or 95% gross income tests that apply to REITs,
provided that certain identification requirements are met. To the extent that we enter into other types of hedging transactions or
fail to properly identify such transaction as a hedge, the income is likely to be treated as non-qualifying income for purposes of
both of the gross income tests. As a result of these rules, we may be required to limit our use of advantageous hedging techniques
or implement those hedges through a TRS. This could increase the cost of our hedging activities because our TRS may be subject
to tax on gains or expose us to greater risks associated with changes in interest rates than we would otherwise want to bear. In
addition, losses in our TRS will generally not provide any tax benefit, except that such losses may be carried forward to offset
future taxable income of the TRS.
Changes to U.S. federal income tax laws could materially and adversely affect us and our stockholders.
The present U.S. federal income tax treatment of REITs and their shareholders may be modified, possibly with retroactive effect,
by legislative, judicial or administrative action at any time, which could affect the U.S. federal income tax treatment of an investment
in our shares. The U.S. federal income tax rules, including those dealing with REITs, are constantly under review by persons
involved in the legislative process, the IRS and the U.S. Treasury Department, which results in statutory changes as well as frequent
revisions to regulations and interpretations.
On December 22, 2017, the President signed into law tax legislation, commonly known as the Tax Cuts and Jobs Act ("TCJA"),
which makes substantial changes to the Code. Among those changes are a significant permanent reduction in the generally applicable
corporate tax rate, a temporary reduction in the highest marginal income tax rate applicable to individuals subject to a “sunset”
provision, the elimination or modification of various currently allowed deductions (including substantial limitations on the
deductibility of interest), certain additional limitations on the deduction of net operating losses and preferential effective rates of
taxation on most ordinary REIT dividends and certain business income derived by non-corporate taxpayers in comparison to other
ordinary income recognized by such taxpayers. The effect of these, and the many other, changes made in the TCJA is highly
uncertain, both in terms of their direct effect on the taxation of an investment in our common stock and their indirect effect on the
value of our assets or shares of our common stock or market conditions generally. Furthermore, many of the provisions of the
TCJA will require guidance through the issuance of Treasury regulations in order to assess their effect. There may be a substantial
delay before such regulations are issued in final form, increasing the uncertainty as to the ultimate effect of the statutory amendments
on us. There may also be technical corrections legislation proposed with respect to the TCJA, the effect and timing of which cannot
be predicted and which may be adverse to us or our stockholders. See Note 21, Income Taxes to our audited consolidated financial
statements for a further discussion of the TCJA.
Risks Related to our Debt and Equity Securities
Our cash available for distribution to stockholders may not be sufficient to make distributions at expected levels, and we
may need to borrow in order to make such distributions; consequently, we may not be able to make such distributions in
full.
If cash available for distribution generated by our assets is less than our estimate or if such cash available for distribution decreases
in future periods from expected levels, our inability to make the expected distributions could result in a decrease in the market
price of our common stock. Distributions made by us will be authorized and determined by our board of directors in its sole
discretion out of funds legally available therefor and will be dependent upon a number of factors, including restrictions under
applicable law and our capital requirements. We may not be able to make or sustain distributions in the future. To the extent that
we decide to make distributions in excess of our current and accumulated earnings and profits, such distributions would generally
be considered a return of capital for U.S. federal income tax purposes to the extent of the holder’s adjusted tax basis in its shares.
A return of capital is not taxable, but it has the effect of reducing the holder’s adjusted tax basis in its investment. To the extent
that distributions exceed the adjusted tax basis of a holder’s shares, they will be treated as gain from the sale or exchange of such
stock. If we borrow to fund distributions, our future interest costs would increase, thereby reducing our earnings and cash available
for distribution from what they otherwise would have been.
Future offerings of debt, which would be senior to our common stock upon liquidation, and/or preferred equity securities,
which may be senior to our common stock for purposes of distributions or upon liquidation, may adversely affect the
market price of our common stock.
In the future, we may attempt to increase our capital resources by making additional offerings of debt or preferred equity securities,
including medium-term notes, trust preferred securities, senior or subordinated notes and preferred stock. Upon liquidation, holders
of our debt securities and shares of preferred stock and lenders with respect to other borrowings will receive distributions of our
40
available assets prior to the holders of our common stock. Additional equity offerings may dilute the holdings of our existing
stockholders or reduce the market price of our common stock, or both. Holders of our common stock are not entitled to preemptive
rights or other protections against dilution. Our preferred stock, if issued, could have a preference on liquidating distributions or
a preference on distribution payments that could limit our ability to make a distribution to the holders of our common stock.
Because our decision to issue securities in any future offering will depend on market conditions and other factors beyond our
control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, our stockholders bear the risk
of our future offerings reducing the market price of our common stock and diluting their stock holdings in us.
Increases in market interest rates may cause potential investors to seek higher dividend yields and therefore reduce demand
for our common stock and result in a decline in our stock price.
One of the factors that may influence the price of our common stock is the dividend yield on our common stock (the amount of
dividends as a percentage of the price of our common stock) relative to market interest rates. An increase in market interest rates,
which are currently at low levels relative to historical rates, may lead prospective purchasers of our common stock to expect a
higher dividend yield, which we may be unable or choose not to provide. Higher interest rates would likely increase our borrowing
costs and potentially decrease the cash available for distribution. Thus, higher market interest rates could cause the market price
of our common stock to decline.
The number of shares available for future sale could adversely affect the market price of our common stock.
We cannot predict whether future issuances of shares of our common stock or the availability of shares of our common stock for
resale in the open market will decrease the market price per share of our common stock. Sales of a substantial number of shares
of our common stock in the public market, or the perception that such sales might occur, could adversely affect the market price
of the shares of our common stock. For example, upon physical settlement of certain forward sale agreements in February 2017,
we issued approximately 4.4 million shares of our common stock and upon physical settlement of a forward sale agreement in
December 2018, we issued approximately 2.5 million shares of our common stock. Physical settlement of these forward sale
agreements or other forward sale agreements in the future have resulted or will result in dilution to our earnings per share. In
addition, we have registered shares of common stock that were reserved for issuance under our Restated 2012 Long Term Incentive
Plan and under our 2014 Employee Stock Purchase Plan, and these shares can generally be freely sold in the public market,
assuming any applicable restrictions and vesting requirements are satisfied. If any or all of these holders cause a large number of
their shares to be sold in the public market, the sales could reduce the trading price of our common stock and could impede our
ability to raise future capital on terms acceptable to us or at all.
The market price and trading volume of our common stock may be volatile.
The market price of our common stock may be volatile. In addition, the trading volume in our common stock may fluctuate and
cause significant price variations to occur. If the market price of our common stock declines significantly, a holder may be unable
to resell shares at a profit or at all. We cannot provide any assurance that the market price of our common stock will not fluctuate
or decline significantly in the future.
Some of the factors that could negatively affect the market price of our common stock or result in fluctuations in the price or
trading volume of our common stock include:
•
•
•
•
•
•
•
•
•
•
•
actual or anticipated variations in our quarterly results of operations or distributions;
changes in our funds from operations or earnings estimates;
publication of research reports about us or the real estate, technology or data center industries;
increases in market interest rates that may cause purchasers of our shares to demand a higher yield;
changes in market valuations of similar companies;
adverse market reaction to any additional debt we may incur in the future;
additions or departures of key personnel;
actions by institutional stockholders;
speculation in the press or investment community about our company or industry or the economy in general;
the occurrence of any of the other risk factors presented in this Form 10-K; and
general market and economic conditions.
Our earnings and cash distributions will affect the market price of shares of our common stock.
To the extent that the market value of a REIT’s equity securities is based primarily upon market perception of the REIT’s growth
potential and its current and potential future cash distributions, whether from operations, sales, acquisitions, development or
refinancing and is secondarily based upon the value of the underlying assets, shares of our common stock may trade at prices that
are higher or lower than the net asset value per share. To the extent we retain operating cash flow for investment purposes, working
41
capital reserves or other purposes rather than distributing the cash flow to stockholders, these retained funds, while increasing the
value of our underlying assets, may negatively impact the market price of our common stock. Our failure to meet market expectations
with regard to future earnings and cash distributions would likely adversely affect the market price of our common stock.
42
ITEM 1B.
UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
PROPERTIES
The information set forth under the caption “Our Portfolio” in Item 1 of this Annual Report on Form 10-K is incorporated by
reference herein.
ITEM 3.
LEGAL PROCEEDINGS
In the ordinary course of our business, from time to time, we are subject to claims and administrative proceedings. We do not
believe any currently outstanding matters would have, individually or in the aggregate, a material effect on our business, financial
condition and results of operations or liquidity and cash flows.
ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
43
PART II
ITEM 5.
ISSUER PURCHASE OF EQUITY SECURITIES.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND
A) Market Information
Our common stock is listed on the NASDAQ Global Select Market under the symbol “CONE”. The following table sets forth the
high and low sales price of our common stock and the distributions we declared with respect to the periods indicated.
First Quarter 2017
Second Quarter 2017
Third Quarter 2017
Fourth Quarter 2017
First Quarter 2018
Second Quarter 2018
Third Quarter 2018
Fourth Quarter 2018
B)
Holders
Market Price
High
Low
Dividend declared
$
51.91 $
59.35
65.73
64.62
59.65
59.46
69.01
64.11
44.66 $
50.56
53.75
57.02
43.49
48.61
57.86
50.26
0.42
0.42
0.42
0.42
0.46
0.46
0.46
0.46
As of February 14, 2019, CyrusOne Inc. had 101 shareholders of record and 108,257,818 outstanding shares.
C)
Distribution Policy
We have made distributions in the form of dividends each quarter since the completion of our initial public offering ("IPO") as
shown in the table above. In order to comply with the REIT requirements of the Code, we are required to make quarterly distributions
to our shareholders of at least 90% of our taxable income. Distributions made by the Company are determined by our board of
directors in its sole discretion. If we have underestimated our cash available for distribution, we may need to increase our borrowings
in order to fund our intended distributions. Notwithstanding the foregoing, our $3.0 Billion Credit Facility and indentures restrict
CyrusOne LP from making distributions to holders of its operating partnership units, or redeeming or otherwise repurchasing
shares of its operating partnership units, after the occurrence and during the continuance of an event of default, except in limited
circumstances including as necessary to enable CyrusOne Inc. to maintain its qualification as a REIT and to minimize the payment
of income taxes.
D)
Recent Sales of Unregistered Securities
Period
(a) Total Number of
Shares of Common
Stock Purchased(1)
(b) Average Price
Paid per Common
Share
(c) Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
(c) Maximum
Number (or
Approximate Dollar
Value) of Shares that
May Yet be
Purchased
February 1, 2018 - February 28, 2018
86,232 $
March 1, 2018 - March 31, 2018
April 1, 2018 - April 30, 2018
May 1, 2018 - May 31, 2018
July 1, 2018 - July 31, 2018
November 1, 2018 - November 30, 2018
19
2,266
2,261
6,232
3,472
100,482 $
51.45
52.88
53.02
54.11
61.92
54.63
52.30
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
N/A
(1) - Represents the common stock surrendered by employees to CyrusOne to satisfy such employee's tax withholding obligations in connection with the
vesting of restricted stock.
44
E)
Stock Performance
The following graph compares the cumulative total stockholder return on CyrusOne Inc.’s common stock for the year ended
December 31, 2018, with the cumulative total return on the S&P 500 Market Index and the MSCI US REIT Index (RMZ). The
comparison assumes that $100 was invested on December 31, 2013 in CyrusOne Inc.’s common stock and in each of these indices
and assumes reinvestment of dividends, if any.
Five Year Cumulative Total Shareholder Return Comparison
CyrusOne Inc. Return Relative to the S&P 500 Index and MSCI U.S. REIT
8,
Date:
350
340
330
320
310
300
290
280
270
260
250
240
230
220
210
200
190
180
170
160
150
140
130
120
110
100
90
CyrusOne Inc.
S&P 500 Index
MSCI U.S. REIT
Pricing Date
CONE
S&P 500
MSCI US REIT
December 31, 2013
December 31, 2014
December 31, 2015
December 31, 2016
December 31, 2017
December 31, 2018
F)
Issuer Purchases of Equity Securities
None.
45
100.00
127.70
180.36
222.56
305.19
280.18
100.00
113.69
115.26
129.05
157.22
150.33
100.00
130.38
133.67
145.16
152.52
145.55
ITEM 6.
SELECTED FINANCIAL DATA
The following table sets forth selected financial and operating data on a consolidated historical basis.
Our business was originally comprised of the historical data center activities and holdings of CBI. CBI operated a Cincinnati-based
data center business for 10 years before acquiring Cyrus Networks LLC, a data center operator in Texas. In anticipation of our IPO,
these businesses were combined under our operating partnership, CyrusOne LP, which was created as a Maryland limited partnership
on July 31, 2012. CyrusOne Inc., a Maryland corporation, was also formed on July 31, 2012, and is the parent of the wholly-owned
general partner of the operating partnership. Effective December 31, 2013, CyrusOne Inc. qualified as a real estate investment trust
for federal income tax purposes. Certain activities are conducted through our taxable REIT subsidiaries, CyrusOne TRS Inc., a
Delaware corporation, and CyrusOne Finance Corp., a Maryland corporation.
The financial information presented below as of December 31, 2018 and 2017, and results for the years ended December 31, 2018,
2017 and 2016, has been derived from our audited consolidated financial statements included elsewhere in the Form 10-K. The
financial information for the years ended December 31, 2015 and 2014 have been derived from our audited consolidated financial
statements not included in this Form 10-K.
The following selected financial data should be read in conjunction with our combined historical financial statements and the related
notes and with “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” which are included in
this Form 10-K.
46
IN MILLIONS, except per share data
Statement of Operations Data:
Revenue
Operating expenses:
Property operating expenses
Sales and marketing
General and administrative
Depreciation and amortization
Transaction, acquisition, integration and other related
expenses (a)
Impairment losses (b)
Operating income
Interest expense
Unrealized gain on marketable equity investment
Loss on early extinguishment of debt (c)
Income tax expense
Income (loss) from continuing operations
Noncontrolling interest in net loss
Net income (loss) attributed to common
shareholders
Per share data:
Basic weighted average common shares outstanding
Diluted weighted average common shares outstanding
Basic income (loss) per common share
Diluted income (loss) per common share
Dividends declared per share
Balance Sheet Data (at year end):
Investment in real estate, net
Total assets
Debt (d)
Capital lease obligations and lease financing
arrangements (e)
Noncontrolling interest/Parent net investment (f)
Other Financial Data:
Capital expenditures
2018
2017
2016
2015
2014
$
821.4 $
672.0 $
529.1 $
399.3 $
330.9
292.4
19.6
80.6
334.1
5.0
—
89.7
(94.7)
9.9
(3.1)
(0.6)
1.2
—
235.1
17.0
67.0
258.9
11.9
58.0
24.1
(68.1)
—
(36.5)
(3.0)
(83.5)
—
187.5
16.9
60.7
183.9
4.6
5.0
70.5
(48.8)
—
—
(1.8)
19.9
—
148.7
12.1
46.6
141.5
18.4
9.2
22.8
(41.2)
—
—
(1.8)
(20.2)
(4.8)
124.5
12.8
34.6
118.0
1.0
—
40.0
(39.5)
—
(13.6)
(1.4)
(14.5)
(6.7)
$
$
$
$
$
1.2 $
(83.5) $
19.9 $
(15.4) $
(7.8)
99.8
100.4
— $
— $
1.84 $
88.9
88.9
(0.95) $
(0.95) $
1.68 $
78.3
79.0
0.24 $
0.24 $
1.52 $
54.3
54.3
(0.30) $
(0.30) $
1.26 $
4,293.0 $
3,058.4 $
2,023.1 $
1,392.0 $
5,592.5
2,624.7
156.7
—
4,312.1
2,089.4
142.0
—
2,852.4
1,240.1
146.5
—
2,195.6
996.5
162.2
—
29.2
29.2
(0.30)
(0.30)
0.84
1,051.4
1,571.0
644.3
66.8
256.2
$
1,328.5 $
1,406.8 $
731.1 $
234.5 $
284.2
(a)
(b)
(c)
(d)
(e)
(f)
Represents legal, accounting and consulting fees incurred in connection with completed and potential business combinations, integration of acquisitions,
failed transactions and costs of secondary offerings.
See Item 7 for discussion of costs incurred in 2017 and 2016. The 2015 amount represents the exit of Austin 1, a leased facility.
See Item 7 for discussion of costs incurred in 2018 and 2017. The 2014 amount represents a loss of $13.6 million associated with the repurchase of 6.375%
senior notes and the write-off of deferred financing costs.
See Note 12, Debt to our audited consolidated financial statements included elsewhere in this Form 10-K for details of debt as of December 31, 2018 and
2017. As of December 31, 2016, 2015 and 2014, debt consisted of our $525 million 6.375% senior notes due 2022, revolving credit facility and term loan
facility.
Lease financing arrangements represent leases of real estate where we were involved in the construction of structural improvements to develop buildings into
data centers. When we bear substantially all the construction period risk, such as managing or funding construction, we are deemed to be the accounting
owner of the leased property. These transactions generally do not qualify for sale-leaseback accounting due to our continued involvement in these data center
operations. For these transactions, at the lease inception date, we recognize the fair value of the leased building as an asset in investment in real estate and
as a liability in lease financing arrangements. See Note 13, Capital Lease Obligations and Lease Financing Arrangements to our audited consolidated financial
statements.
Parent's net investment represents CBI's net investment in CyrusOne Inc., CyrusOne GP, CyrusOne LP and its subsidiaries. Prior to November 20, 2012,
these entities were not separate legal entities.
47
ITEM 7.
OPERATIONS
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF
You should read the following discussion and analysis of our results of operations, financial condition and liquidity in conjunction
with our consolidated financial statements and the related notes included elsewhere in this Annual Report on Form 10-K ("Form
10-K"). Some of the information contained in this discussion and analysis or set forth elsewhere in this report, including information
with respect to our plans and strategies for our business, statements regarding the industry outlook, our expectations regarding
the future performance of our business and the other non-historical statements contained herein are forward-looking statements.
See “Special Note Regarding Forward-Looking Statements.” You should also review the “Risk Factors” section of this report for
a discussion of important factors that could cause actual results to differ materially from the results described herein or implied
by such forward-looking statements.
The consolidated financial statements included in this Form 10-K reflect the historical financial position, results of operations
and cash flows of CyrusOne for all periods presented.
Overview
Our Company. We are a fully integrated, self-managed data center real estate investment trust ("REIT") that owns, operates and
develops enterprise-class, carrier-neutral, multi-tenant and single-tenant data center properties. Our data centers are generally
purpose-built facilities with redundant power and cooling. They are not network specific and enable customer connectivity to a
range of telecommunication carriers. We provide mission-critical data center facilities that protect and ensure the continued
operation of information technology ("IT") infrastructure for approximately 1,000 customers in 48 data centers and two recovery
centers in 13 markets (10 cities in the U.S., London, U.K., Singapore and Frankfurt, Germany).
For the year ended December 31, 2018, revenues by primary revenue source were as follows (in millions).
Colocation rent
Metered power reimbursements
Interconnection revenue
Equipment sales
Other revenue
Revenue
Our Portfolio
Year Ended
December 31, 2018
$
$
644.6
104.0
40.0
11.9
20.9
821.4
We own and operate 48 data centers and two recovery centers totaling 6.7 million Net Rentable Square Feet ("NRSF"), 88% of
the Colocation Square Feet ("CSF") is leased and has 703 megawatts ("MW") of power capacity. This includes 12 buildings where
the Company leases such facilities. We are lessee of approximately 5% of our total operating NRSF as of December 31, 2018. Also
included in our total NRSF, CSF and MW are pre-stabilized assets (which include data halls that have been in service for less than
24 months and are less than 85% leased) that have approximately 416,886 NRSF, 33% of the CSF is leased with capacity of 34
MW of power.
In addition, we have properties under development comprising approximately 1.5 million NRSF and 126 MW of power capacity.
The estimated remaining total costs to develop these properties is between $613 million and $714 million. The final costs to
develop could change depending on the capital improvements required based on the lease contracts executed on such properties.
We also have 470 acres of land available for future data center development.
Operational Overview
The following discussion provides an overview of the Company’s capital and financing activity, operations and transactions for
the year ended December 31, 2018 and should be read in conjunction with the full discussion of the Company’s operating results,
liquidity, capital resources and risk factors included or incorporated by reference elsewhere in this Form 10-K.
Outlook
We seek to maximize long-term earnings growth and shareholder value primarily through increasing cash flow at existing properties,
and developing high-quality data center assets and campuses at attractive cash yields with long-term, stable operating income. In
48
addition, the Company will, from time to time, acquire existing properties which meet our strategic criteria, offer in-place cash
flow and have strong growth prospects.
Fundamentals for data center real estate remain strong, supported by trends that particularly favor data center assets, including
the exponential growth in global data, the growth of e-commerce and demand for outsourcing of data storage and cloud-based
applications. We expect continued economic growth in the markets we operate in 2019, which we expect to result in ongoing
positive demand for data center space as companies expand and upgrade information system platforms.
New data center development, including speculative development, is present in most domestic and international metropolitan
markets in response to strong tenant demand. However, construction remains rational in relation to net absorption in most markets.
We expect that the operating environment will continue to be favorable for lessors given our favorable outlook for market demand
for data center real estate.
In terms of capital investment, we will continue to pursue selective development of new buildings and the opportunistic acquisition
of buildings in markets where we perceive demand and market rental rates will provide attractive financial returns.
We may, from time to time, selectively dispose of non-strategic assets in an effort to enhance long-term growth in earnings and
cash flows, as well as to improve the overall quality of our portfolio.
We anticipate having sufficient liquidity to fund our capital and operating expenses, including costs to maintain our properties
and distributions, though we may finance investments, including acquisitions and developments, with the issuance of new shares
of our common stock, proceeds from asset sales or through additional borrowings. Please see “Liquidity and Capital Resources”
for additional discussion.
Inflation
The U.S. economy has experienced low inflation over the last several years, as a result, inflation has not had a significant impact
on our business. Our customer leases generally do not provide for annual increases in rent based on inflation. As a result, we bear
the risk of increases in the costs of operating and maintaining our data center facilities. Some of our leases have annual rent
escalators, typically ranging from 1-3%; as a result we bear the risk of increases in operating costs. Some of our leases are structured
to pass-through the cost of sub-metered utilities. In the future, we expect more of our leases to pass-through utility costs. In addition,
more than 70% of our leases expire within six years which enables us to replace existing leases with new leases at then existing
rates.
Summary of Significant Transactions and Activities for the Year Ended December 31, 2018
Real Estate Acquisitions, Development and Other Activities
During the year ended December 31, 2018, we had cash capital expenditures of $865.7 million, of which $855.2 million related
to the construction of data centers. The expansion and development of additional power capacity and building square feet contributed
to our year-over-year revenue increase in 2018. As of December 31, 2018, the remaining cost to development is $613.0 million
to $714.0 million and are expected to add 126 MWs and 438,514 CSF. In addition, during the year ended December 31, 2018, we
acquired 182 acres of land for future development for $182.3 million.
On August 24, 2018, the Company completed its previously announced acquisition of Zenium Topco Ltd. and certain other affiliated
entities. Zenium is a hyperscale data center provider in Europe with four operating data centers in London and Frankfurt, and land
sites available for development in London and Frankfurt. In connection with the acquisition, and after giving effect to a post-
closing working capital adjustment, the Company paid aggregate cash consideration of approximately $462.8 million, net of
approximately $12.7 million of cash acquired, and assumed outstanding indebtedness of approximately $86.3 million. In the fourth
quarter of 2018, the Company paid approximately $1.0 million related to the post-closing working capital adjustment which is
included above in the aggregate cash consideration. The Company financed the acquisition with proceeds from the $300.0 million
delayed draw term loan included in the 2023 Term Loan and $174.5 million of borrowings under the $1.7 Billion Revolving Credit
Facility (each as defined below). As a result of the acquisition, the Company recognized a $72.7 million deferred tax liability
associated with temporary differences between the book basis and tax basis of the assets acquired in the transaction.
Capital and Financing Activity
In March 2018, the Company entered into a new senior unsecured credit agreement (the "$3.0 Billion Credit Facility"). The new
agreement includes a $1.7 billion revolving credit facility (the "$1.7 Billion Revolving Credit Facility") with a maturity of March
49
2022 that includes a one-year extension option exercisable by the Company, subject to certain conditions. The agreement includes
a 5-year term loan with commitments totaling $1.0 billion (the "2023 Term Loan") and a $300.0 million 7-year term loan (the
"2025 Term Loan"). The 2023 Term Loan includes a delayed draw feature which allowed the Company to draw $300.0 million
in up to three tranches over a six-month period in multiple currencies. The $1.7 Billion Revolving Credit Facility has the option
to borrow in non-USD currencies. The $3.0 Billion Credit Facility also includes an accordion feature providing for an aggregate
increase in the revolving and term components to $4.0 billion, subject to certain conditions. As of December 31, 2018, the Company
had $1.0 billion, $300.0 million and $143.0 million outstanding under the 2023 Term Loan, the 2025 Term Loan and the $1.7
Billion Revolving Credit Facility, respectively. The Company also assumed a $86.3 million construction facility as part of the
Zenium acquisition which was subsequently paid off during 2018 using borrowings under our credit facility.
On March 29, 2018, the Company used the proceeds of the $1.0 billion of borrowings under the $3.0 Billion Credit Facility to
repay in full the Company’s prior credit facility in an amount of $900.0 million and expects to use a portion of the remaining
liquidity, along with cash, for further build out of existing data centers and the development of new data centers.
During the year ended December 31, 2018, the Company sold approximately 3.0 million shares of its common stock through its
At-The-Market ("ATM") stock offering programs, 6.7 million shares through a public offering and 2.5 million through a forward
sale agreement. The sales generated net proceeds of approximately $697.5 million, net of sales commissions, underwriting discounts
and estimated expenses of $26.0 million. As of December 31, 2018, there was approximately $750.0 million in remaining capacity
of the $750.0 million authorized under the New 2018 ATM Stock Offering Program (as defined in Item 7 under "Liquidity and
Capital Resources").
Concentration of revenue
We define our annualized backlog as the twelve-month recurring generally accepted accounting principles in the U.S. ("GAAP")
revenue for executed lease contracts achieved upon full occupancy which have not commenced as of the end of a period. Our
backlog as of December 31, 2018 and 2017 was approximately $54.0 million and approximately $20.0 million, respectively.
Approximately half of our backlog as of December 31, 2018 relates to one significant customer (where the Company recognized
revenue in excess of 10% of our consolidated revenue for the year ended December 31, 2018). During 2018, one customer
represented 18% of our revenue. We expect these backlog lease contracts to primarily commence through the first half of 2019.
Similar to our revenue growth noted above, our increase in backlog is primarily due to the robust demand across the cloud and
enterprise companies and larger lease contracts. Because GAAP revenue for any period is generally a function of straight line
revenue recognized from lease contracts in existence at the beginning of a period, as well as lease contract renewals and new
customer lease contracts commencing during the period, backlog as of any period is not necessarily indicative of near-term
performance. Our presentation of backlog may differ from other companies in our industry.
Critical Accounting Policies and Estimates
The preparation of financial statements in conformity with GAAP requires management to use judgment in the application of
accounting policies, including making estimates and assumptions. If our judgment or interpretation of the facts and circumstances
relating to various transactions had been different or different assumptions were made, it is possible that different accounting
policies would have been applied, resulting in different financial results or a different presentation of our financial statements.
Estimates, judgments and assumptions are based on historical experiences that we believe to be reasonable under the circumstances.
From time to time we re-evaluate those estimates and assumptions. Our discussion and analysis of financial condition and results
of operations are based upon our consolidated financial statements, which have been prepared in accordance with GAAP. Our
management evaluates these estimates on an ongoing basis, based upon information currently available and on various assumptions
management believes are reasonable as of the date of the financial statements.
Our actual results may differ from these estimates. We have provided a summary of our significant accounting policies in Note 3,
Summary of Significant Accounting Policies to our audited consolidated financial statements included in this Form 10-K.
Revenue Recognition
The revenues from colocation rent revenue, metered power reimbursements and interconnection revenue are recognized under
the lease accounting standard and revenues from managed services, equipment sales, installations and other services (generally
revenue from contracts with customers) are recognized under the revenue accounting standard. An allowance for doubtful accounts
is recognized when the collection of trade receivables is deemed to be unlikely. We adopted the new revenue recognition standard
effective January 1, 2018. The information in this section describes our current revenue recognition policies. See Note 4, “Recently
Adopted Accounting Pronouncements” to our audited consolidated financial statements included in this Form 10-K for additional
information related to the adoption.
50
Leasing Revenue
Our leasing revenues primarily consists of colocation rent, metered power reimbursements and interconnection services. We
generally are not entitled to reimbursements for rental expenses including real estate taxes, insurance or other common area
operating expenses.
Colocation Rent Revenue and Metered Power Reimbursements Revenue
Colocation rent revenues are generally billed monthly in advance based on the contracted power or leased space. Some contracts
may provide initial free rent periods and rents that escalate over the term of the contract. If rents escalate without the lessee gaining
access to or control over additional leased power or space, at the beginning of the lease term, the rental payments are recognized
as revenue on a straight-line basis over the term of the lease. If rents escalate because the lessee gains access to and control over
additional power and or leased space, revenue is recognized in proportion to the additional power or space in the periods that the
lessee has control over the use of the additional space or power. The excess of revenue recognized over amounts contractually due
is recognized as a straight-line receivable, which is included in other assets in our consolidated balance sheet. When customers
make an advance payment in connection with a lease period or contractual obligation, deferred revenue is recorded.
Some of our leases are structured on a full-service gross basis in which the customer pays a fixed amount for both colocation rent
and power. The revenue for these types of leases is recorded in colocation lease revenue. Other leases provide that the customer
is separately billed for power based upon actual or estimated metered usage. Metered power reimbursement revenue is generally
billed one month in arrears, and an estimate of this revenue is accrued in the month that the associated power is provided and
recorded in Metered power reimbursements on the Consolidated Statement of Operations.
Revenue from Contracts with Customers
Service Revenue
Managed services include the provisioning of a full-service managed data center, monitoring customer computer equipment,
managing backups and storage, utilization reporting and other related ancillary information technology services. Management
service contracts generally range from one to five years. Revenue is measured based on the consideration specified in the contract
and recognized over time as we satisfy the performance obligation. Other services generally include installation of customer
equipment, performing customer system re-boots, server cabinet and cage management, power monitoring, shipping and receiving,
resolving technical issues, and other services requested by the customer. Installation services include mounting, wiring, and testing
of customer owned equipment. The installation period is typically short term in duration, and accordingly, revenue from the
installation of customer equipment is recognized at a point-in-time once the installation is complete and the performance obligation
is satisfied. Revenue from other services is recognized over time as the Company performs the service as the customer is determined
to consume the benefits of the service as the Company performs.
Acquisition of Properties
Investment in real estate consist of land, buildings, improvements and integral equipment utilized in our data center operations.
We expect most acquisitions to be asset acquisitions rather than a business combination as our typical acquisitions consist of
properties whereby substantially all the fair value of gross assets acquired is concentrated in a single asset set (land, building and
in-place leases), which are treated as asset acquisitions. Asset acquisitions are recorded at the cumulative acquisition costs and
allocated to the assets acquired and liabilities assumed on a relative fair value basis. The fair value of identifiable tangible assets
such as land, building, building and land improvements, and tenant improvements is determined on an “as-if-vacant” basis. In
estimating the fair value of each component acquired management considers appraisals, replacement cost, its own analysis of
recently acquired and existing comparable properties, market rental data and other related information.
Capitalization of Costs
As described in Note 3, Summary of Significant Accounting Policies to our audited consolidated financial statements, we capitalize
costs such as personnel, office and other expenses based on an estimate of the time spent on projects that are directly related to
capital projects and acquisition of leases. In February 2016, the Financial Accounting Standards Boards (“FASB”) issued an
Accounting Standards Update (“ASU”) that modifies existing accounting standards for lease accounting whereby lessors may
only capitalize incremental direct costs and as a result, upon adoption the Company will no longer capitalize internal indirect costs.
The Company capitalized indirect leasing costs of $1.7 million and $0.9 million for the years ended December 31, 2018 and 2017,
respectively. The ASU is effective for the Company on January 1, 2019.
51
For all development projects, the Company uses its professional judgment in determining whether such costs meet the criteria for
capitalization or must be expensed as incurred. The Company capitalizes interest, real estate taxes, insurance, payroll and costs
associated with projects and individuals directly responsible for and who spend their time on development activities. Capitalization
is ceased upon substantial completion of the project. These costs are recorded on the Consolidated Balance Sheets in construction
in progress for each specific property.
Impairment
Management reviews the carrying value of long-lived assets, including intangible assets with finite lives, when events or changes
in circumstances indicate that the carrying amount of the assets may not be recoverable. When such impairment indicators exist,
we review an estimate of the undiscounted future cash flows expected to result from the use of an asset (or group of assets) and
its eventual disposition and compare such amount to its carrying amount. To determine the cash flows we consider factors such
as future operating income, leasing demand, rental rates, competition and other factors. The estimate of expected future cash flows
is inherently uncertain and relies to a considerable extent on management estimates and assumptions, including current and future
market conditions, projected growth in our CSF, projected recurring rent churn (as described below), lease renewal rates and our
ability to generate new leases on favorable terms. If our undiscounted net cash flows indicate that we are unable to recover the
carrying value of the asset, an impairment loss is recognized. An impairment loss is measured as the amount by which the asset’s
carrying value exceeds its estimated fair value. The estimates and assumptions used to determine undiscounted cash flows and
fair value requires significant judgement by management.
For the year ended December 31, 2018, we recognized no impairment losses. For the year ended December 31, 2017, we recognized
impairment losses of $58.0 million which includes the impairment loss of $54.4 million for our leased data center facilities in the
Connecticut markets and $3.6 million related to our leased facility in Singapore, which are included in impairment losses in our
Consolidated Statement of Operations.
Key Operating Metrics
Annualized Rent. We calculate annualized rent as monthly contractual rent (defined as cash rent including customer reimbursements
for metered power) under existing customer leases as of December 31, 2018, multiplied by 12. Monthly contractual rent is primarily
for data center space, power and connectivity; however, it includes rent for office space and other ancillary services. For the month
of December 2018, customer reimbursements were $112.0 million annualized and consisted of reimbursements by customers
across all facilities with separately metered power. Other companies may not define annualized rent in the same manner.
Accordingly, our annualized rent may not be comparable to others. Management believes annualized rent provides a useful measure
of our currently in place lease revenue.
Colocation Square Feet ("CSF"). We calculate CSF as the NRSF at an operating facility that is currently leased or readily available
for lease as colocation space, where customers locate their servers and other IT equipment.
Leased Rate. We calculate leased rate by dividing CSF under signed leases for colocation space by total CSF. Occupied rate differs
from Percent leased. Percent occupied is determined based on CSF billed to customers under signed leases divided by total CSF.
Leases signed but that have not commenced billing are not included.
Recurring Rent Churn. We calculate recurring rent churn as any reduction in recurring rent due to customer terminations, service
reductions or net pricing decreases as a percentage of rent at the beginning of the period, excluding any impact from metered
power reimbursements or other usage-based billing.
Capital Expenditures. Expenditures that expand, improve or extend the life of real estate and non-real estate property are deemed
capital expenditures. Management views its capital expenditures as comprised of acquisitions of real estate, development of real
estate, recurring real estate expenditures and all other non-real estate capital expenditures. Purchases of land or buildings from
third parties represent acquisitions of real estate. Discretionary capital spending that expands or improves our data centers is
deemed development of real estate. Replacements of data center assets are considered recurring real estate expenditures. Purchases
of software, computer equipment and furniture and fixtures are included in all other non-real estate capital expenditures.
Factors That May Influence Future Results of Operations
Rental Income. Our revenue growth will depend on our ability to maintain our existing revenue base and to sell new capacity that
becomes available as a result of our development activities. As of December 31, 2018, we have customer leases for approximately
88% of our CSF. Our ability to grow revenue will also be affected by our ability to maintain or increase rental rates at our properties.
We believe the current rates charged to our customers generally reflect appropriate market rates. This is consistent with our relatively
flat historical re-leasing spreads. As such, we do not anticipate significant rate increases or decreases in the aggregate as contracts
52
renew. However, negative trends in one or more of these factors could adversely affect our revenue in future periods. Future
economic downturns, regional downturns affecting our markets or oversupply of, or decrease in demand for, data center colocation
services could impair our ability to attract new customers or renew existing customers’ leases on favorable terms, and this could
adversely affect our ability to maintain or increase revenues.
Leasing Arrangements. As of December 31, 2018, 16% of our leased NRSF was to customers on a full-service gross basis. Under
a full-service gross model, the customer pays a fixed monthly rent amount, and we are responsible for all data center facility
electricity, maintenance and repair costs, property taxes, insurance and other utilities associated with that customer’s space. For
leases under this model, fluctuations in our customers’ monthly utilization of power and the prices our utility providers charge us
impact our profitability. As of December 31, 2018, 84% of our leased NRSF was to customers with separately metered power.
Under the metered power model, the customer pays us a fixed monthly rent amount, plus its actual costs of sub-metered electricity
used to power its data center equipment, plus an estimate of costs for electricity used to power supporting infrastructure for the
data center, expressed as a factor of the customer’s actual electricity usage. We are responsible for all other costs listed in the
description of the full-service gross model above. Fluctuations in a customer’s utilization of power and the supplier pricing of
power do not impact our profitability under the metered power model. In future periods, we expect more of our contracts to be
structured to bill power on a metered power basis.
Growth and Expansion Activities. Our ability to grow our revenue and profitability will depend on our ability to acquire and
develop data center space globally at an appropriate cost and to lease the data center space to customers on favorable terms. During
the year ended December 31, 2018, we increased our operational NRSF by 18%, bringing our total operating NRSF to approximately
6,725,700 at December 31, 2018. Our portfolio, as of December 31, 2018, also included approximately 1,492,091 NRSF under
development, as well as 1,670,000 NRSF of additional powered shell space under roof available for development. In addition, we
have approximately 470 acres of land that are available for future data center shell development. We expect that the eventual
construction of this future development space will enable us to accommodate a portion of the future demand of our existing and
future customers and increase our future revenue, profitability and cash flows.
Scheduled Lease Expirations. Our ability to maintain low recurring rent churn and renew expiring customer leases on favorable
terms will impact our results of operations. Our data center uncommitted capacity as of December 31, 2018, was approximately
1,362,726 NRSF. Excluding month-to-month leases, leases representing 9% and 9% of our total NRSF are scheduled to expire in
2019 and 2020, respectively. These leases represented approximately 13% and 13% of our annualized rent as of December 31,
2018. Month-to-month leases represented 4% of our annualized rent as of December 31, 2018. Recurring rent churn was 5.0%
for the year ended December 31, 2018, as compared to 3.9% for the year ended December 31, 2017. Our recurring rent churn for
each quarter in 2018 ranged from 0.5% to 2.6%, in comparison to a range of 0.6% to 1.4% in 2017.
Conditions in Significant Markets. Our properties are located in 13 distinct markets (10 cities in the U.S., plus London, U.K.,
Singapore and Frankfurt, Germany). Cincinnati, Dallas, Houston, New York Metro, Northern Virginia, Phoenix and San Antonio
accounted for approximately 84% of our annualized rent as of December 31, 2018. Positive or negative conditions in these markets
could impact our overall profitability.
53
Results of Operations
Comparison of Years Ended December 31, 2018 and 2017
IN MILLIONS, except per share data
For the Year Ended December 31,
2018
2017
$ Change
2018 vs. 2017
% Change
2018 vs. 2017
104.8
33.8
5.9
4.6
0.3
149.4
57.3
2.6
13.6
75.2
(6.9)
(58.0)
83.8
65.6
(26.6)
9.9
33.4
82.3
2.4
84.7
(29.5)
(54.9)
6.1
(78.3)
19.4 %
48.1 %
17.3 %
63.0 %
1.5 %
22.2 %
24.4 %
15.3 %
20.3 %
29.0 %
(58.0)%
n/m
12.9 %
n/m
39.1 %
n/m
n/m
n/m
(80.0)%
n/m
(6.0)%
(6.0)%
n/m
(5.6)%
Revenue:
Colocation rent
Metered power reimbursements
Interconnection revenue
Equipment sales
Other revenue
Total revenue
Operating expenses:
Property operating expenses
Sales and marketing
General and administrative
Depreciation and amortization
Transaction, acquisition, integration and other
related expenses
Impairment losses
Total operating expenses
Operating income
Interest expense
Unrealized gain (loss) on marketable equity investment
Loss on early extinguishment of debt
Net income (loss) before income taxes
Income tax expense
Net income (loss)
Operating gross margin
Capital expenditures *:
Asset acquisitions, primarily real estate, net of cash
acquired
Investment in real estate
Recurring maintenance capital
Total
Metrics information:
CSF*
Leased rate*
Income (loss) per share - basic and diluted
Dividends declared per share
$
$
$
$
$
$
644.6
$
539.8
$
104.0
40.0
11.9
20.9
821.4
292.4
19.6
80.6
334.1
5.0
—
731.7
89.7
(94.7)
9.9
(3.1)
1.8
(0.6)
70.2
34.1
7.3
20.6
672.0
235.1
17.0
67.0
258.9
11.9
58.0
647.9
24.1
(68.1)
—
(36.5)
(80.5)
(3.0)
1.2
$
(83.5) $
10.9%
3.6%
462.8
$
492.3
$
855.2
10.5
910.1
4.4
1,328.5
$
1,406.8
$
*
See “Key Operating Metrics” above for a definition of capital expenditures, CSF and leased rate.
54
3,819,000
3,267,000
552,000
17 %
88%
— $
1.84
$
83%
(0.95)
1.68
Operations
As of December 31, 2018, we had approximately 1,000 customers (not including customers that have signed leases but have not
begun occupying space), many of which have signed leases for multiple sites and multiple services, amenities and/or features. We
generate recurring revenues from leasing colocation space and nonrecurring revenues from the initial installation and set-up of
customer equipment. We provide customers with data center services pursuant to leases with a customary initial term of three to
ten years. As of December 31, 2018, the weighted average initial term of our leases was approximately 5.5 years and the weighted
average remaining term was 4.4 years based upon annualized rent. Lease expirations through 2021, excluding month-to-month
leases, represent 28% of our total NRSF, or 41% of our aggregate annualized rent as of December 31, 2018. At the end of the lease
term, customers may sign a new lease or automatically renew pursuant to the terms of their lease. The automatic renewal period
could be for varying lengths, depending on the terms of the contract, such as, for the original lease term, one year or month-to-
month. As of December 31, 2018, 1% of the NRSF in our portfolio was subject to month-to-month leases.
Revenue
For the year ended December 31, 2018, revenue was $821.4 million, an increase of $149.4 million, or 22%, compared to $672.0
million for the year ended December 31, 2017. Fluctuations in revenue are dependent upon our ability to maintain our existing
revenue base, sell new capacity, and maintain or increase rental rates at our properties. Rent churn of 5.0% for the year ended
December 31, 2018 increased by 1.1% as compared to the 3.9% for the year-ended December 31, 2017. Colocation square feet
increased 17% for the year ended December 31, 2018 as compared to the year ended December 31, 2017. Leased CSF as of
December 31, 2018 was 88%, a 5% increase as compared to 83% as of December 31, 2017. The occupancy percentage increase
is primarily related to data centers in the lease-up stage that moved into stabilized properties (which include data halls that have
been in service for at least 24 months or are at least 85% leased) during the year ended December 31, 2018. The properties are
located in Austin, Houston, Northern Virginia, Phoenix and San Antonio.
The revenue increase of $149.4 million in 2018, as compared to 2017 is primarily due to the following:
•
•
•
$144.2 million increase in revenue from existing and new customers including $96.9 million in colocation rent
revenue, $28.3 million in metered power rent reimbursements and $6.8 million in interconnection revenue,
$27.7 million increase as a result timing of acquisitions for the year ended December 31, 2018, as compared to the year
ended December 31, 2017, as we benefited in 2018 from a full year of revenue related to the Sentinel acquisition completed
in February 2017 and the acquisition of Zenium which closed in August 2018 (see Note 6, Acquisition and Purchase of
Fixed Assets for further information regarding acquisitions), and
offset in part by a $23.1 million decrease as a result of the increase of 1.1 percent in churn.
Operating Expenses
Property operating expenses
For the year ended December 31, 2018, property operating expenses were $292.4 million, an increase of $57.3 million, or 24%,
compared to $235.1 million for the year ended December 31, 2017 primarily due to the following:
•
•
•
•
•
$9.9 million increase in property operating expenses as a result of the timing of acquisitions for the year ended December
31, 2018, as compared to the year ended December 31, 2017, due to the Sentinel acquisition completed in February 2017
and the acquisition of Zenium which closed in August 2018.
$41.8 million increase primarily due to electricity, repairs and maintenance, and security primarily due to our increased
NRSF, higher utility rates, and power usage.
$2.6 million increase in equipment cost of sales for the year ended December 31, 2018,
$5.7 million increase in personnel, property taxes and other operating expenses, primarily related to personnel supporting
our additional CSF deployed and
offset in part by a $2.7 million decrease in rental expense due to the expiration of two leased facilities in 2018.
Sales and marketing
For the year ended December 31, 2018, sales and marketing expenses were $19.6 million, an increase of $2.6 million, or 15%,
compared to $17.0 million for the year ended December 31, 2017 primarily related to transition costs of $1.6 million related to
increases in sales relocation costs for our new Seattle office and payroll-related costs of $0.8 million.
55
General and administrative
For the year ended December 31, 2018, general and administrative expenses were $80.6 million, an increase of $13.6 million, or
20%, compared to $67.0 million for the year ended December 31, 2017 primarily due to the following:
•
•
$2.9 million increase in 2018 compared to 2017 as a result of acquisitions of Sentinel and Zenium discussed previously,
$10.7 million increase in 2018 compared to 2017 due to increases of $6.0 million in personnel expenses and $2.3 million
in legal and professional fees associated with implementing new accounting standards, new European privacy regulatory
compliance and related system implementation costs, IT license support and legal fees.
Depreciation and amortization
For the year ended December 31, 2018, depreciation and amortization expense was $334.1 million, an increase of $75.2 million,
or 29%, compared to $258.9 million for the year ended December 31, 2017. The acquisition of Sentinel and Zenium resulted in
an increase in depreciation and amortization expense of $23.7 million for the year ended December 31, 2018. The remaining
increase was primarily driven by assets that were placed in service in 2018. Since December 31, 2017, approximately $829.7
million of new data center assets have been placed in service. Depreciation and amortization expense is expected to increase in
future periods as we acquire and develop new properties and expand our existing data center facilities.
Transaction, acquisition, integration and other related expenses
For the year ended December 31, 2018, the Company incurred costs of $5.0 million primarily related to diligence efforts on certain
targeted acquisitions. For the year ended December 31, 2017, the Company incurred costs of $11.9 million primarily related to
diligence efforts on certain targeted acquisitions and costs incurred for integration of acquisitions.
Impairment losses
There were no impairment losses for the year ended December 31, 2018. For the year ended December 31, 2017, the Company
recognized impairments of $58.0 million which includes the impairment loss of $54.4 million for our leased data center facilities
in the Connecticut markets and $3.6 million related to our leased facility in Singapore.
Non-Operating Income and Expenses
Interest expense
For the year ended December 31, 2018, interest expense was $94.7 million, an increase of $26.6 million, or 39%, as compared to
$68.1 million for the year ended December 31, 2017. The increase in interest expense was partially offset by an increase in our
capitalized interest from the year ended December 31, 2017 of $7.4 million due to increased development activity. The gross
increase in interest expense was primarily a result of the increase in the average principal balances of senior notes outstanding of
$800.0 million for the year ended December 31, 2017, versus $1.2 billion during the year ended December 31, 2018. We anticipate
drawing on our $1.7 Billion Revolving Credit Facility to fund, in part, capital investments in data centers, including acquisitions.
Accordingly, we anticipate our interest expense to increase in future periods.
Unrealized gain on marketable equity investment
For the year ended December 31, 2018, the unrealized gain on our marketable equity investment in GDS was $9.9 million, primarily
as a result of an appreciation in GDS's share price since December 31, 2017.
Loss on early extinguishment of debt
For the year ended December 31, 2018, loss on early extinguishment of debt was $3.1 million, primarily due to the Company's
entering into the $3.0 Billion Credit Facility and fully retiring the then-existing facility. For the year ended December 31, 2017,
loss on early extinguishment of debt was $36.5 million, primarily due to costs associated with the repurchase of the $474.8 million
in aggregate face value of our 2022 Notes ($525.0 million of 6.375% senior notes due 2022 (the "2022 Notes")).
Income tax expense
For the year ended December 31, 2018, income tax expense was $0.6 million, a decrease of $2.4 million, as compared to $3.0
million for the year ended December 31, 2017, primarily related to deferred tax benefits associated with our assets acquired in the
Zenium acquisition.
56
Results of Operations
Comparison of Years Ended December 31, 2017 and 2016
IN MILLIONS, except per share data
For the Year Ended December 31,
2017
2016
$ Change
2017 vs. 2016
% Change
2017 vs. 2016
28.9 %
32.2 %
17.6 %
(27.7)%
13.2 %
27.0 %
25.4 %
0.6 %
10.4 %
40.8 %
n/m
n/m
41.3 %
(65.8)%
39.5 %
n/m
n/m
66.7 %
n/m
n/m
53.1 %
(18.5)%
92.4 %
Revenue:
Colocation rent
Metered power reimbursements
Interconnection revenue
Equipment sales
Other revenue
Total revenue
Operating expenses:
Property operating expenses
Sales and marketing
General and administrative
Depreciation and amortization
Transaction, acquisition, integration and other
related expenses
Impairment losses
Total operating expenses
Operating income
Interest expense
Loss on early extinguishment of debt
Net income (loss) before income taxes
Income tax expense
Net income (loss)
Operating gross margin
Capital expenditures *:
Asset acquisitions, primarily real estate, net of cash
acquired
Investment in real estate
Recurring maintenance capital
Total
Metrics information:
CSF*
Leased rate*
Income (loss) per share - basic and diluted
Dividends declared per share
$
$
$
$
$
$
539.8
$
418.7
$
121.1
70.2
34.1
7.3
20.6
672.0
235.1
17.0
67.0
258.9
11.9
58.0
647.9
24.1
(68.1)
(36.5)
(80.5)
(3.0)
(83.5) $
3.6%
53.1
29.0
10.1
18.2
529.1
187.5
16.9
60.7
183.9
4.6
5.0
458.6
70.5
(48.8)
—
21.7
(1.8)
19.9
13.3%
$
492.3
910.1
4.4
$
131.1
594.6
5.4
1,406.8
$
731.1
$
17.1
5.1
(2.8)
2.4
142.9
47.6
0.1
6.3
75.0
7.3
53.0
189.3
(46.4)
(19.3)
(36.5)
(102.2)
(1.2)
(103.4)
361.2
315.5
(1.0)
675.7
3,267,000
2,080,000
1,187,000
57 %
83%
(0.95) $
1.68
$
85%
0.24
1.52
*
See “Key Operating Metrics” above for a definition of capital expenditures, CSF and leased rate.
Revenue
For the year ended December 31, 2017, revenue was $672.0 million, an increase of $142.9 million, or 27%, compared to $529.1
million for the year ended December 31, 2016 primarily due to the following:
57
•
•
•
•
$47.4 million increase in revenue due to the purchase of CME Group's Chicago-Aurora I data center (the "Aurora
Properties") in Aurora, Illinois on March 31, 2016 and the acquisition of Sentinel Properties on February 28, 2017
(together, the "2016 and 2017 Acquisitions") in the year ended December 31, 2017,
$17.1 million increase in metered power reimbursements, which includes $4.9 million from the 2016 and 2017
Acquisitions,
$2.4 million decrease in equipment sales for the year ended December 31, 2017 to $12.3 million compared to $14.7
million for the corresponding period in 2016 and
$85.7 million increase in revenue related to new customers and growth from existing customers, net of churn and items
mentioned above for the year ended December 31, 2017.
As of December 31, 2017, we had approximately 5,717,000 NRSF, an increase of approximately 1,813,000 NRSF from
December 31, 2016. As of December 31, 2017, we had 197 Fortune 1000 customers, or other companies of equivalent size,
compared to 181 as of December 31, 2016. As of December 31, 2017, we had a total of approximately 1,000 customers.
Our capacity at December 31, 2017 was approximately 3,267,000 CSF, which is an increase of 57% from December 31, 2016.
The utilization rate of our data center facilities was 83% as of December 31, 2017, compared to 85% as of December 31, 2016.
We had a few data centers in the lease-up stage that had not stabilized as of December 31, 2017, and we refer to these as pre-
stabilized properties. Excluding these properties, the utilization rate for our stabilized portfolio was 93% as of December 31, 2017,
as compared to 92% as of December 31, 2016. Prior to fiscal year 2018, utilization rate was a key operating metric. We calculated
utilization rate by dividing CSF under signed leases for available space (whether or not the customer has occupied the space) by
total CSF.
Recurring rent churn was 3.9% for the year ended December 31, 2017, as compared to 10.8%, which included company initiated
churn of approximately 2.6%, for the year ended December 31, 2016.
Operating Expenses
Property operating expenses
For the year ended December 31, 2017, property operating expenses were $235.1 million, an increase of $47.6 million, or 25%,
compared to $187.5 million for the year ended December 31, 2016. The 2016 and 2017 Acquisitions resulted in an increase to
property operating expenses of $14.3 million. Equipment cost of sales increased $0.4 million for the year ended December 31,
2017. Excluding the impact of the 2016 and 2017 Acquisitions and equipment cost of sales, property operating expenses increased
by $32.9 million including increases in electricity costs of $15.8 million, property taxes increased $8.9 million and contract services,
personnel and other costs increased $8.2 million, primarily to support our additional CSF deployed.
Sales and marketing
For the year ended December 31, 2017, sales and marketing expenses were $17.0 million, an increase of $0.1 million, or 1%,
compared to $16.9 million for the year ended December 31, 2016. The 2016 and 2017 Acquisitions resulted in an increase to sales
and marketing expenses of $0.2 million, increase in employee-related costs of $1.1 million, and severance-related costs of $0.5
million as a result of a reduction-in-force for the marketing department, offset by a decrease in advertising and other expenses of
$1.7 million.
General and administrative
For the year ended December 31, 2017, general and administrative expenses were $67.0 million, an increase of $6.3 million,
compared to $60.7 million for the year ended December 31, 2016. The 2016 and 2017 Acquisitions resulted in an increase to
general and administrative expenses of $0.5 million. Employee-related costs increased by $5.9 million due to higher payroll and
related costs to support the growth in the business. The Company incurred $2.4 million related to implementing new accounting
standards and investing in system implementations. This increase was offset by a decrease in professional fees and other of $2.5
million.
Depreciation and amortization
For the year ended December 31, 2017, depreciation and amortization expense was $258.9 million, an increase of $75.0 million,
or 41%, compared to $183.9 million for the year ended December 31, 2016. The 2016 and 2017 Acquisitions resulted in an increase
in depreciation and amortization expense of $32.7 million for the year ended December 31, 2017. The remainder of the increase
was driven by assets that were placed in service after the fourth quarter of 2016. Depreciation and amortization expense is expected
to increase in future periods as we acquire and develop new properties, and expand our existing data center facilities.
58
Transaction, acquisition, integration and other related expenses
For the year ended December 31, 2017, the Company incurred costs of $11.9 million primarily related to diligence efforts on
certain targeted acquisitions including unrealized acquisitions and costs incurred for the integration of Sentinel Properties. For the
year ended December 31, 2016, the Company incurred costs of $4.6 million associated with diligence efforts on certain targeted
acquisitions, including unrealized acquisitions.
Impairment losses
For the year ended December 31, 2017, we recognized impairment losses of $58.0 million, which includes the impairment loss
of $54.4 million for our Norwalk I, Stamford - Riverbend and Stamford - Omega facilities. Additionally, during the year ended
December 31, 2017, we recognized an impairment loss of $3.6 million related to our leased facility in Singapore. For the year
ended December 31, 2016, we recognized impairment losses of $5.0 million which related primarily to two properties, South Bend
- Crescent, a leased facility, and Cincinnati - Goldcoast, an owned facility.
Non-Operating Income and Expenses
Interest expense
For the year ended December 31, 2017, interest expense was $68.1 million, an increase of $19.3 million, or 40%, as compared to
$48.8 million for the year ended December 31, 2016. The increase was primarily a result of additional average borrowings under
our previous revolving credit facility, the issuance of the 2024 Notes and 2027 Notes in March 2017 (each as defined in Note 12,
Debt to our audited consolidated financial statements) and November 2017 and the redemption of the 2022 Notes, partially offset
by $6.3 million due to an increase in capitalized interest.
Loss on early extinguishment of debt
For the year ended December 31, 2017, loss on early extinguishment of debt was $36.5 million, primarily due to costs associated
with the repurchase of the $474.8 million in aggregate face value of our 2022 Notes for total consideration of $515.1 million,
including accrued and unpaid interest of $10.3 million. Deferred financing costs, bond premium and legal fees related to the 2022
Notes of $6.2 million were written off. In addition, $0.3 million related to our previous $2.0 billion credit facility were written off
due to the exit of certain lenders from the credit facility.
Income tax expense
For the year ended December 31, 2017, income tax expense was $3.0 million, an increase of $1.2 million, as compared to $1.8
million for the year ended December 31, 2016.
Significant Balance Sheet Fluctuations
The table below relates to significant fluctuations in certain line items of our condensed consolidated balance sheets from December
31, 2017 to December 31, 2018 (in millions):
Total investment in real estate, net
$
4,293.0 $
3,058.4 $
1,234.6
December 31, 2018
December 31, 2017
Difference
Equity investments
Debt, net
Additional paid in capital
198.1
2,624.7
2,837.4
175.6
2,089.4
2,125.6
22.5
535.3
711.8
The increase in total investment in real estate, net was primarily due to the acquisition of Zenium and the continued development
of data centers in Chicago, Dallas, Northern Virginia and Phoenix, less depreciation expense of $293.1 million.
The increase in equity investment was primarily due to the fair value increase in our GDS investment and resulting unrealized
gain, and our investment in ODATA Brasil S.A. and ODATA Colombia S.A.S. (collectively "ODATA"). We did not receive any
distributions related to our equity investments during 2018 or 2017. With respect to GDS, because the unrealized gain (loss) on
investment is based on the fair value of our marketable equity investment in GDS, our unrealized gain (loss) on investment has
and may continue to fluctuate materially in future results in the Consolidated Statements of Operations. These fluctuations may
cause certain of our financial results to fluctuate materially from quarter-to-quarter. A $1.00 change in the trading price of the
American depositary shares of GDS would result in our unrealized gain (loss) on marketable equity investment changing by $8.0
million.
59
The increase in debt, net was primarily due to proceeds from the Company's $3.0 Billion Credit Facility which were in excess of
funds used to retire the prior credit facility. Also, the Company used its $300.0 million term loan delayed draw feature of the 2023
Term Loan to fund the Zenium acquisition and assumed a €100.0 million construction facility, which was paid off in December
2018.
The increase in additional paid in capital was primarily due to proceeds from the Company's September 2018 public equity offering,
full settlement of the Company's forward agreement sale in December 2018 and ATM stock offering programs.
Investing Activities
For the year ended December 31, 2018, capital expenditures were $1,328.5 million. Our capital expenditures for 2018 included
the acquisition of Zenium for $462.8 million. In addition, 2018 capital expenditures included $865.7 million related primarily to
the continued development in key markets, primarily Chicago, Dallas, Northern Virginia and Somerset. We also made an equity
investment in ODATA for $12.6 million.
For the year ended December 31, 2017, capital expenditures were $1,406.8 million, including the purchase price of the Sentinel
Properties on February 28, 2017 for $492.3 million. Other capital expenditures for the year ended December 31, 2017 related
primarily to development projects underway in Chicago, Cincinnati, Dallas, Northern Virginia, Phoenix and San Antonio; and the
purchase of land parcels in Allen, Texas, Atlanta, Georgia and Quincy, Washington for future development for approximately
$20.2 million.
For the year ended December 31, 2016, capital expenditures were $731.1 million, including the purchase price of the Chicago-
Aurora I data center in Aurora, Illinois for $131.1 million. Other capital expenditures for the year ended December 31, 2016 related
primarily to development projects in our Chicago, Dallas, Houston, Northern Virginia, Phoenix and San Antonio markets. Also,
during the year ended December 31, 2016, the Company purchased four land parcels for development for approximately $54.5
million.
Key Performance Indicators - Non-GAAP Financial Measures
In addition to amounts presented in accordance with GAAP, we also present certain supplemental non-GAAP financial measures
related to the Company's performance. These non-GAAP financial measures should not be construed as being more important
than comparable GAAP financial measures. In compliance with Securities and Exchange Commission ("SEC") requirements, our
non-GAAP financial measures presented herein are reconciled to net income (loss), the most directly comparable GAAP financial
measure. Neither the SEC nor any regulatory body has passed judgment on these non-GAAP measurements.
Funds from Operations and Normalized Funds from Operations
We use funds from operations ("FFO") and normalized funds from operations ("Normalized FFO"), which are non-GAAP financial
measures commonly used in the REIT industry, as supplemental performance measures. We use FFO and Normalized FFO as
supplemental performance measures because, when compared period over period, they capture trends in occupancy rates, rental
rates and operating costs. We also believe that, as widely recognized measures of the performance of REITs, FFO and Normalized
FFO are used by investors as a basis to evaluate REITs.
We calculate FFO as net income (loss) computed in accordance with GAAP before real estate depreciation and amortization and
asset impairments and loss on disposal. While it is consistent with the definition of FFO promulgated by the National Association
of Real Estate Investment Trusts ("NAREIT"), our computation of FFO may differ from the methodology for calculating FFO
used by other REITs. Accordingly, our FFO may not be comparable to others.
We calculate Normalized FFO as FFO plus loss on early extinguishment of debt; unrealized (gain) loss on marketable equity
investment; new accounting standards and regulatory compliance and the related system implementation costs; amortization of
trade names; transaction, acquisition and other integration expenses; severance and management transition costs; legal claim costs
and other special items as appropriate. The Company believes its Normalized FFO calculation provides a comparable measure
between different periods. Other REITs may not calculate Normalized FFO in the same manner. Accordingly, our Normalized
FFO may not be comparable to others.
In addition, because FFO and Normalized FFO exclude real estate depreciation and amortization and real estate impairments, and
capture neither the changes in the value of our properties that result from use or from market conditions, nor the level of capital
expenditures and leasing commissions necessary to maintain the operating performance of our properties, all of which have real
economic effect and could materially impact our results from operations, the utility of FFO and Normalized FFO as measures of
our performance is limited. Therefore, FFO and Normalized FFO should be considered only as supplements to net income (loss)
60
presented in accordance with GAAP as measures of our performance. FFO and Normalized FFO should not be used as measures
of our liquidity or as indicative of funds available to fund our cash needs, including our ability to make distributions. FFO and
Normalized FFO also should not be used as supplements to or substitutes for cash flow from operating activities computed in
accordance with GAAP.
On January 1, 2018, we adopted the new accounting standard with respect to revenue recognition, see Note 3, Summary of
Significant Accounting Policies and Note 5, Revenue Recognition to our audited consolidated financial statements for additional
information. We have adopted the new standard using the modified retrospective transition method, where financial statement
presentations prior to the date of adoption are not adjusted. Accordingly, all information related to periods prior to 2018 have not
been adjusted, including non-GAAP measurements.
The following table reflects the reconciliation to GAAP net income to FFO and Normalized FFO for the years ended
December 31, 2018, 2017 and 2016:
Net income (loss)
Real estate depreciation and amortization(1)
Impairment losses(1)
Funds from Operations ("FFO") - NAREIT defined
Loss on early extinguishment of debt
Unrealized (gain) loss on marketable equity investment
New accounting standards and regulatory compliance and the related system implementation costs
Amortization of tradenames(1)
Transaction, acquisition, integration and other related expenses(1)
Severance and management transition costs
Legal claim costs
Year Ended
December 31,
2018
2017
2016
$
$
1.2 $
(83.5) $
325.5
—
250.6
58.0
326.7 $
225.1 $
3.1
(9.9)
3.0
1.7
4.8
2.3
0.6
36.5
—
2.4
1.4
11.9
0.5
1.1
19.9
176.5
5.0
201.4
—
—
—
1.3
4.6
1.9
1.0
Normalized Funds from Operations ("Normalized FFO")
$
332.3 $
278.9 $
210.2
(1) Reflects certain reclassifications of previously reported amortization of customer intangibles and transaction costs to conform with the current presentation.
Net Operating Income
We use Net Operating Income ("NOI"), which is a non-GAAP financial measure commonly used in the REIT industry, as a
supplemental performance measure. We use NOI as a supplemental performance measure because, when compared period over
period, it captures trends in occupancy rates, rental rates and operating expenses. We also believe that, as a widely recognized
measure of the performance of REITs, NOI is used by investors as a basis to evaluate REITs.
We calculate NOI as revenue less property operating expenses, each of which are presented in the accompanying consolidated
statements of operations and/or net income (loss), which is presented in the accompanying consolidated statements of operations,
adjusted for sales and marketing expenses, general and administrative expenses, depreciation and amortization expenses,
transaction, acquisition, integration and other related expenses, impairment losses, interest expense, unrealized (gain) loss on
marketable equity securities, loss on early extinguishment of debt, income tax expense and other special items as appropriate.
Amortization of deferred leasing costs is presented in depreciation and amortization expenses, which is excluded from NOI. Sales
and marketing expenses are not property-specific, rather these expenses support our entire portfolio. As a result, we have excluded
these sales and marketing expenses from our NOI calculation, consistent with the treatment of general and administrative expenses,
which also support our entire portfolio. Because the calculation of NOI excludes various expenses, the utility of NOI as a measure
of our performance is limited. Other REITs may not calculate NOI in the same manner. Accordingly, our NOI may not be comparable
to others. Therefore, NOI should be considered only as a supplement to revenue and to net income (loss) presented in accordance
with GAAP as a measure of our performance. NOI should not be used as a measure of our liquidity or as indicative of funds
available to fund our cash needs, including our ability to make distributions. NOI also should not be used as a supplement to or
substitute for cash flow from operating activities computed in accordance with GAAP.
61
The following table reflects the reconciliation of Net Income (Loss) to NOI for the years ended December 31, 2018, 2017 and
2016:
Net Income (Loss)
Sales and marketing expenses
General and administrative expenses
Depreciation and amortization expenses
Transaction, acquisition, integration and other related expenses
Impairment losses
Interest expense
Unrealized (gain) loss on marketable equity investment
Loss on early extinguishment of debt
Income tax expense
Net Operating Income
Year Ended
December 31,
2018
2017
2016
$
1.2 $
(83.5) $
19.6
80.6
334.1
5.0
—
94.7
(9.9)
3.1
0.6
17.0
67.0
258.9
11.9
58.0
68.1
—
36.5
3.0
19.9
16.9
60.7
183.9
4.6
5.0
48.8
—
—
1.8
$
529.0 $
436.9 $
341.6
Financial Condition, Liquidity and Capital Resources and Material Terms of Our Indebtedness
Liquidity and Capital Resources
We are required to distribute at least 90% of our REIT taxable income, determined without regard to the dividends paid deduction
and excluding any net capital gains, to our stockholders on an annual basis in order to maintain our status as a REIT for federal
income tax purposes. Accordingly, we intend to make, but are not contractually bound to make, regular quarterly distributions to
common stockholders from cash flows from operating activities. All such distributions are at the discretion of our board of directors.
We have an effective shelf registration statement that allows us to offer for sale unspecified amounts of various classes of equity
and debt securities and warrants. As circumstances arise, we may issue debt, equity and/or warrants from time to time on an
opportunistic basis, dependent upon market conditions and available pricing.
During the first quarter of 2018, the Board authorized the Company to enter into sales agreements pursuant to which the Company
may issue and sell from time to time shares of its common stock having an aggregate sales price of up to $500 million (the "2018
ATM Stock Offering Program"). The 2018 ATM Stock Offering Program replaced a prior ATM stock offering program. During
the fourth quarter of 2018, the Board authorized the Company to enter into sales agreements pursuant to which the Company may
issue and sell from time to time shares of its common stock having an aggregate sales price of up to $750 million (the “New 2018
ATM Stock Offering Program”). The New 2018 ATM Stock Offering Program replaced the 2018 ATM Stock Offering Program.
For the year ended December 31, 2018, the Company sold approximately 3.0 million shares of its common stock under its ATM
stock offering programs, generating net proceeds of approximately $152.0 million after giving effect to sales agent commissions
of $1.9 million. As of December 31, 2018, there was $750.0 million under the New 2018 ATM Stock Offering Program available
for future offerings.
On September 28, 2018, CyrusOne Inc. completed a public offering of 6.7 million shares of its common stock for $397.3 million,
net of underwriting discounts and expenses of approximately $18.1 million. In connection with this offering, on September 25,
2018, CyrusOne Inc. entered into a forward sale agreement with Morgan Stanley & Co. LLC with respect to an additional 2.5
million shares of its common stock. On December 28, 2018, the Company effected a full physical settlement of the previously
announced forward sale agreement entered into with Morgan Stanley & Co. LLC. Upon settlement, the Company issued all such
shares to Morgan Stanley & Co. LLC in its capacity as forward purchaser, in exchange for net proceeds of approximately $148.2
million, in accordance with the provisions of the forward sales agreement.
Our total common stock issuance for the year ended December 31, 2018 was $699.6 million which included $545.8 million under
equity offerings and forward sales agreements, $151.7 million under the ATM stock offering programs and $2.1 million related
to employee stock purchases and stock options exercised.
62
As of December 31, 2018, the total number of outstanding shares of common stock was approximately 108.3 million.
Short-term Liquidity
Our short-term liquidity requirements primarily consist of operating, sales and marketing, and general and administrative expenses,
dividend payments and recurring capital expenditures for our data center properties. We generally expect to meet these requirements
from our cash flow from operations, cash balances and availability under our $1.7 Billion Revolving Credit Facility. For the year
ended December 31, 2018, our cash provided by operating activities was $309.3 million. This was in excess of our dividend
payment for the year ended December 31, 2018 of $181.1 million. We expect our cash provided by operating activities to continue
to trend in excess of our dividend payment.
Available capacity under the $3.0 Billion Credit Facility as of December 31, 2018 was $1,549.0 million, all of which is related to
the $1.7 Billion Revolving Credit Facility. Total liquidity as of December 31, 2018 was approximately $1,613.4 million, which
included availability of $1,549.0 million under the $3.0 Billion Credit Facility, and cash and cash equivalents of $64.4 million.
For the year ended December 31, 2018, we had borrowings of $143.0 million under the revolving portion of our credit facilities.
Long-term Liquidity
Our long-term liquidity requirements primarily consist of our capital expenditures for the development and acquisition of our data
centers. For the year ended December 31, 2018, our cash capital expenditures were $1,328.5 million. Our capital expenditures are
primarily discretionary, excluding leases under contract, and have been utilized to expand our existing data center properties,
acquire or construct new facilities, or both. We intend to continue to pursue additional growth opportunities and are prepared to
commit additional resources to support this growth. We expect our total estimated capital expenditures for 2019 to be between
$1.0 billion and $1.1 billion. We expect to meet our long-term liquidity requirements, including potential acquisitions, from cash,
cash flows from our operations, issuances of debt and equity securities, and borrowings under our $1.7 Billion Revolving Credit
Facility.
We regularly monitor commodity and labor pricing trends related to our data center development capital expenditures, where a
large proportion of our current development project costs are under firm price commitments. Accordingly, while we have
experienced limited price increases in certain selective materials due to recent international trade negotiations and actions, we
currently do not anticipate any material adverse effect on our overall development costs.
As of December 31, 2018, all of our outstanding debt matures between 2023 and 2027, a weighted average of 5.5 years to maturity.
We expect to refinance these debts at or before their maturities, or retire the debt from the sources described in this section. Our
interest rate mix was 45% fixed and 55% floating.
In addition to the sources of capital described herein, we have access to other potential sources of capital including mortgage
financing, property dispositions and sales of joint venture interests in our properties.
Material Terms of Our Indebtedness
See Note 12, Debt for the material terms of our indebtedness under the $3.0 Billion Credit Facility and our 2024 Notes and 2027
Notes.
63
Cash Flows
Our primary sources of cash during 2018 were earnings from our operations, net proceeds from our $3.0 Billion Credit Facility,
and net proceeds from the issuances of common stock, 2024 Notes and 2027 Notes. Our primary uses of cash during 2018 were
capital expenditures for the Zenium acquisition, the development of real estate, funding our operations and payment of dividends.
The following table summarizes our cash flows for the years ended December 31, 2018, 2017 and 2016.
IN MILLIONS
For the year ended December 31,
Cash provided by operations
Cash used in investing activities
Cash provided by financing activities
Comparison of Years Ended December 31, 2018 and 2017
2018
2017
2016
$
309.3 $
289.5 $
(1,341.1)
944.7
(1,506.8)
1,354.6
180.6
(731.1)
549.3
Cash provided by operating activities for the year ended December 31, 2018 was $309.3 million compared to $289.5 million for
the year ended December 31, 2017, an increase of $19.8 million. The increase was primarily due to an increase in operating income
as explained above, partially offset by the increase in interest payments of $46.6 million related to debt, over the corresponding
prior year period, and to a lesser extent, payments of annual property taxes and payment of our year-end bonus.
Cash used in investing activities for the year ended December 31, 2018 was $1,341.1 million compared to $1,506.8 million for
the year ended December 31, 2017. Substantially all of our investing activity for both periods was related to our development and
acquisition activities. Our capital expenditures for 2018 included the acquisition of Zenium for $462.8 million. In addition, 2018
capital expenditures included $865.7 million related primarily to the continued development in key markets, primarily Chicago,
Dallas, Northern Virginia and Somerset. We also made an equity investment in ODATA for $12.6 million.
Our capital expenditures for 2017 included the purchase of the Sentinel Properties for $492.3 million. Capital expenditure for
2017 of $914.5 million related primarily to development projects underway in Chicago, Cincinnati, Dallas, Northern Virginia,
Phoenix and San Antonio; and the purchase of 66 acres in Allen, Texas, 44 acres outside of Atlanta, Georgia and 48 acres in Quincy,
Washington. In addition, we made an investment in GDS of $100.0 million.
Cash provided by financing activities for the year ended December 31, 2018 was $944.7 million compared to $1,354.6 million
for the year ended December 31, 2017. During the year ended December 31, 2018, cash provided by financing activities was due
to the proceeds from the issuance of debt of $1,845.3 million, the issuance of common stock, net of issuance costs, of $699.6
million and net borrowings under our credit facility of $143.0 million. Cash used in financing activities during the year ended
December 31, 2018 primarily related to payments on debt of $1,547.4 million, dividends paid to stockholders of $181.1 million
and other items of $14.7 million. Our board of directors increased our dividend rate from $0.38 per share to $0.42 per share
effective in the first quarter of 2017 and increased our dividend to $0.46 per share effective in the first quarter of 2018.
During the year ended December 31, 2017, cash provided by financing activities was due to proceeds from the issuance of senior
notes of $1,217.8 million, issuance of common stock, net of issuance costs, of $705.7 million and net borrowings under the credit
facility of $115.0 million. Cash used in financing activities during the year ended December 31, 2017 was due to the repurchase
and redemption of the 2022 Notes of $474.8 million and payment of debt extinguishment of $30.4 million, payment of debt
issuance costs relating to the issuance of the 2024 Notes and the 2027 Notes of $19.0 million, dividends paid to stockholders of
$145.7 million, tax payments upon the exercise of equity awards of $6.9 million and other items of $7.1 million.
Comparison of Years Ended December 31, 2017 and 2016
Cash provided by operating activities for the year ended December 31, 2017 was $289.5 million compared to $180.6 million for
the year ended December 31, 2016, an increase of $108.9 million. The increase was primarily driven by an increase in net operating
income of $95.3 million. Deferred revenue increased by $11.0 million, primarily due to up- front payments received by customers.
This increase was offset by the following: an increase in leasing commissions paid in 2017 of $5.2 million due to execution of
long-term contracts and the timing and amounts of interest payments, net of amounts capitalized, of $4.9 million. All other operating
accounts resulted in the remaining difference.
Cash used in investing activities for the year ended December 31, 2017 was $1,506.8 million compared to $731.1 million for the
year ended December 31, 2016. Our capital expenditures for 2017 included the purchase of the Sentinel Properties for $492.3
million. Capital expenditure for 2017 of $914.5 million related primarily to development projects underway in Northern Virginia,
64
Phoenix, Dallas, Chicago, San Antonio and Cincinnati; and the purchase of 48 acres in Quincy, Washington and 66 acres in Allen,
Texas, and 44 acres outside of Atlanta, Georgia. In addition, we made an investment in GDS of $100.0 million.
During the year ended December 31, 2016, our capital expenditures included the purchase of the Aurora Properties for $131.1
million, the purchase of four properties for development in Northern Virginia, Chicago and Phoenix for approximately $54.5
million and $545.5 million for other developments primarily in Northern Virginia, Phoenix, San Antonio, Carrollton and Houston.
Cash provided by financing activities for the year ended December 31, 2017 was $1,354.6 million compared to $549.3 million
for the year ended December 31, 2016. During the year ended December 31, 2017, cash provided by financing activities was due
to proceeds from the issuance of senior notes of $1,217.8 million, issuance of common stock, net of issuance costs, of $705.7
million and net borrowings under a credit facility of $115.0 million. Cash used in financing activities during the year ended
December 31, 2017 was due to the repurchase and redemption of the 2022 Notes of $474.8 million and payment of debt
extinguishment of $30.4 million, payment of debt issuance costs relating to the issuance of the 2024 Notes and the 2027 Notes of
$19.0 million, dividends paid to stockholders of $145.7 million, tax payments upon the exercise of equity awards of $6.9 million
and other items of $7.1 million.
During the year ended December 31, 2016, cash provided by financing activities was due to net borrowings from the credit facility
of $250.0 million and the net proceeds from issuances of common stock of $447.1 million. Cash used in financing activities during
the year of 2016 was due to dividends paid to stockholders of $114.3 million, tax payments upon the exercise of equity awards of
$14.2 million and other items of $19.4 million.
65
Contractual Obligations
The following contractual obligations table summarizes our contractual obligations as of December 31, 2018:
IN MILLIONS
2024 Notes (1)
2027 Notes (1)
Term loans (1)
Capital lease obligations
Interest payments on senior notes, credit
agreement, capital leases and lease financing
arrangements (2)
Non-cancellable operating leases
Construction commitments and purchase
obligations (3)
Lease financing arrangements and other
liabilities (4)
Total (5)
Total
< 1 Year
1-3 Years
3-5 years
Thereafter
$
700.0 $
500.0
1,443.0
33.4
— $
—
—
2.7
— $
—
—
5.7
— $
—
1,143.0
3.0
732.3
64.2
327.3
129.1
5.0
322.1
255.3
8.6
5.2
217.1
7.2
—
700.0
500.0
300.0
22.0
130.8
43.4
—
123.5
3,923.7 $
$
7.9
466.8 $
26.7
301.5 $
12.1
1,382.4 $
76.8
1,773.0
(1) Represents the principal portion of the 2024 Notes, 2027 Notes and Term Loans.
(2)
Includes contractual interest payments on the 2024 Notes, 2027 Notes, $3.0 Billion Credit Facility, Term Loans, capital leases and lease financing
arrangements assuming no early payment of debt in future periods and the exercise of the one-year extension option on the Revolving Credit Facility.
(3) We have issued purchase orders for construction related activities. CyrusOne has non-cancellable purchase commitments related to certain services and
contracts related to construction of data center facilities and equipment. These agreements range from one to two years and provide for payments for early
termination or require minimum payments for the remaining term.
(4) Represents lease financing arrangements of $123.3 million for leased data centers where we are deemed the accounting owner, and asset retirement
obligations of $0.2 million.
(5) Employment contracts have been excluded from this table for the Company's named executive officers as the Company's definitive proxy statement and
other filings with the SEC contain more information with respect to those agreements. All other employees are subject to at-will employment.
The contractual obligations table is presented as of December 31, 2018. The amount of these obligations can be expected to change
over time as new contracts are initiated and existing contracts are completed, terminated or modified.
Contingencies
We are periodically involved in litigation, claims and disputes. Liabilities are established for these claims when losses associated
with these matters are judged to be probable and the loss can be reasonably estimated. Based on information currently available,
consultation with counsel and established reserves, management believes the outcome of all claims will not individually, nor in
the aggregate, have a material effect on our financial position, results of operations or cash flows. For the year ended December 31,
2018, we were not involved in any material lawsuits that required us to recognize an expense.
Off-Balance Sheet Arrangements
Indemnification
During the normal course of business, we make certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include (i) intellectual property indemnities to customers in connection
with the use, sale and/or license of products and services, (ii) indemnities to vendors and service providers pertaining to claims
based on our negligence or willful misconduct and (iii) indemnities involving the representations and warranties in certain contracts.
In addition, we have made contractual commitments to several employees providing for payments upon the occurrence of certain
prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the
maximum potential for future payments that we could be obligated to make.
Also as a part of our normal course of business we procure certain data center equipment (generally generators and power distribution
units) and utility power under purchase commitments, where we would be required to purchase certain minimum volumes. In
general, we expect to manage these contracts such that the committed volume levels are below our current requirements and at
prices that are below current spot market prices. However, if our requirements were to decrease, we could be obligated to complete
the remaining minimum purchase commitments, holding the excess equipment for future development or disposing at then current
prices. As of December 31, 2018, our aggregate commitments under these contracts is approximately $45.4 million.
66
We lease data center facilities and equipment from third parties. Operating lease expense for the year ended December 31, 2018
was $6.6 million. Future lease payments remaining under these operating leases as of December 31, 2018 is approximately $64.2
million.
67
ITEM 7A.
Quantitative and Qualitative Disclosures About Market Risk
Interest Rate Risk
We have exposure to interest rate risk, arising from variable-rate borrowings under our new senior unsecured credit agreement
and our fixed-rate long-term debt.
Our interest rate risk management objectives are to limit the impact of interest rate changes on earnings and cash flows and to
lower overall borrowing costs. To achieve the financing objectives, we borrow primarily at fixed rates or variable rates with what
we believe are the lowest margins available. With regard to variable rate financing, we manage interest rate cash flow risk by
continually identifying and monitoring changes in interest rate exposures that may adversely impact expected future cash flows.
As of December 31, 2018, we had approximately $1.2 billion of contractually outstanding consolidated debt at a weighted average
fixed interest rate of approximately 5.16% and $1.4 billion of amounts outstanding under credit facilities with a weighted average
variable interest rate of monthly LIBOR plus 1.21%. Monthly LIBOR as of December 31, 2018 was 2.53%.
Interest rate fluctuations will generally not affect our future earnings or cash flows on our fixed rate debt unless such instruments
are traded or are otherwise terminated prior to maturity. However, interest rate changes will affect the fair value of our fixed rate
instruments.
Conversely, movements in interest rates on variable rate debt would change our future earnings and cash flows, but not significantly
affect the fair value of those instruments. We are exposed to interest rate changes primarily as a result of our variable rate debt we
incur on our senior unsecured credit agreement and our consolidated cash investments. As of December 31, 2018, our floating
rate debt outstanding is $1,443.0 million. We quantify our exposure to interest rate risk based on how changes in interest rates
affect our net income. We consider changes in the 30-day LIBOR rate to be most indicative of our interest rate exposure as it is a
function of the base rate for our credit facilities. We consider increases of 0.5% to 2.0% in the 30-day LIBOR rate to be reflective
of reasonable changes we may experience in the current interest rate environment. The table below reflects the annual consolidated
effect of an increase in the 30-day LIBOR to our net income related to our significant variable interest rate exposures as of
December 31, 2018 (amounts in millions, where positive amounts reflect an increase in net income and bracketed amounts reflect
a decrease in net income):
Variable rate credit facilities expense
$
(28.9)
$
(21.6)
$
(14.4)
$
(7.2)
2.0%
1.5%
1.0%
0.5%
Floating rate interest income is not significant as of December 31, 2018.
There is no assurance that we would realize such income or expense as such changes in interest rates could alter our asset or
liability positions or strategies in response to such changes. Also, where variable rate debt is used to finance development projects,
the cost of the development is also impacted. If these costs exceed budgeted interest reserves, we may be required to fund the
excess out of other capital sources. The table above reflects interest expense prior to any adjustments for capitalized interest related
to developments.
The following table sets forth the carrying value and fair value face amounts, maturity date and average interest rates at December 31,
2018, for our fixed-rate and variable-rate debt, excluding capital leases and other financing arrangements:
IN MILLIONS
Fixed-rate debt (2024 Notes)
Average interest rate on fixed-rate debt
Fixed-rate debt (2027 Notes)
Average interest rate on fixed-rate debt
Variable-rate debt (2023 Term Loan)
Average interest rate on variable-rate debt
Variable-rate debt (2025 Term Loan)
Average interest rate on variable-rate debt
Euro loan (2023 Revolving Credit Facility)
Average interest rate on variable-rate debt
2019
2020
2021
2022
2023
Thereafter
Total Carrying
Value
Total Fair
Value
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
68
—
—
—
—
— $
705.5
—
5.000%
— $
509.1
—
5.375%
$
$
705.5
509.1
$
$
684.1
488.0
— $1,000.0
— $
1,000.0
$ 1,000.0
— 3.920%
—
—
—
— $
300.0
$
300.0
—
4.230%
— $ 143.0
$
— $
143.0
$
$
300.0
143.0
— 1.450%
—
The fair values of our 2024 Notes and 2027 Notes as of December 31, 2018 were based on the quoted market prices for these
notes, which is considered Level 1 of the fair value hierarchy. The carrying value of the $3.0 Billion Revolving Credit Facility,
the 2023 Term Loan and the 2025 Term Loan approximates estimated fair value as of December 31, 2018, due to the variability
of interest rates and the stability of our credit ratings. These fair value measurements are considered Level 3 of the fair value
hierarchy.
Foreign Currency Risk
As a result of the Zenium acquisition, the Company added foreign operations in the United Kingdom and Germany that along
with operations in Singapore expose the Company to risk from the effects of exchange rate movements of foreign currencies,
which may affect future costs and cash flows. As of December 31, 2018, our exposure to foreign currency is not significant. For
the year ended December 31, 2018 our foreign currency translation adjustment included within stockholders’ equity was $10.9
million.
As a result of the Zenium acquisition, our exposure to foreign currency is expected to increase, primarily related to British pound
sterling and Euro. We expect that future investments and expenditures relating to international operations will be incurred in their
functional currencies. One of the ways we may mitigate future investment and operational foreign currency exposure could be by
borrowing under our $3.0 Billion Credit Facility in the particular foreign currency, subject to availability and applicable borrowing
conditions. However, we would expect to incur foreign currency transaction gains and losses, which would impact our consolidated
net income, and translation of financial statements from the foreign functional currency to U.S. dollars, which would be included
in other comprehensive income or loss and stockholders’ equity. Historically, we have not entered into foreign currency hedges,
but we may consider entering into foreign currency hedges in the future.
Commodity Price Risk
Certain of our operating costs are subject to price fluctuations caused by the volatility of the underlying commodity prices, including
electricity used in our data center operations, and building materials, such as steel and copper, used in the construction of our data
centers. In addition, the lead time to purchase certain equipment for our data centers is substantial which could result in increased
costs for these construction projects. In addition, we have entered into several contracts to purchase electricity. As of December 31,
2018, these contracts represent less than our forecasted usage.
69
ITEM 8.
CONSOLIDATED FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX TO THE CONSOLIDATED FINANCIAL STATEMENTS
Page No.
71
73
74
75
76
77
78
78
78
78
83
85
85
88
90
90
91
91
92
94
95
96
96
96
96
97
102
102
104
105
113
Reports of Independent Registered Public Accounting Firm
Consolidated Financial Statements of CyrusOne Inc.
Consolidated Balance Sheets as of December 31, 2018 and 2017
Consolidated Statements of Operations for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Comprehensive Income (Loss) for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Equity for the years ended December 31, 2018, 2017 and 2016
Consolidated Statements of Cash Flows for the years ended December 31, 2018, 2017 and 2016
Notes to Consolidated Financial Statements
Note 1 - Description of Business
Note 2 - Basis of Presentation
Note 3 - Summary of Significant Accounting Policies
Note 4 - Recently Issued Accounting Standards
Note 5 - Revenue Recognition
Note 6 - Acquisitions and Purchases of Fixed Assets
Note 7 - Investment in Real Estate
Note 8 - Notes Receivable
Note 9 - Equity Investments
Note 10 - Goodwill, Intangible and Other Long-Lived Assets
Note 11 - Other Assets
Note 12 - Debt
Note 13 - Capital Lease Obligations and Lease Financing Arrangements
Note 14 - Fair Value of Financial Instruments
Note 15 - Dividends
Note 16 - Customer Leases
Note 17 - Employee Benefit Plans
Note 18 - Income (Loss) Per Share
Note 19 - Stockholders' Equity
Note 20 - Related Party Transactions
Note 21 - Income Taxes
Note 22 - Commitments and Contingencies
Note 23 - Guarantors
Note 24 - Quarterly Financial Information (Unaudited)
70
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CyrusOne Inc.
Opinion on the Financial Statements
We have audited the accompanying consolidated balance sheets of CyrusOne Inc. (the "Company") as of December 31, 2018 and
2017, and the related consolidated statements of operations, comprehensive income (loss), equity, and cash flows for each of the
three years in the period ended December 31, 2018, and the related notes and the schedules listed in the Index at Item 15(a)(2)
(collectively referred to as the “financial statements”). In our opinion, the financial statements present fairly, in all material respects,
the financial position of the Company as of December 31, 2018 and 2017, and the results of its operations and its cash flows for
each of the three years in the period ended December 31, 2018, in conformity with accounting principles generally accepted in
the United States of America.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the Company’s internal control over financial reporting as of December 31, 2018, based on criteria established in
Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway
Commission and our report dated February 22, 2019 expressed an unqualified opinion on the Company’s internal control over
financial reporting.
Change in Accounting Principle
As discussed in Note 4 to the financial statements, the Company changed its method of accounting for equity investments in the
year ended December 31, 2018 due to the adoption of the Accounting Standards Update 2016-01, Financial Instruments - Overall
(Subtopic 825-10).
Basis for Opinion
These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on
the Company’s financial statements based on our audits. We are a public accounting firm registered with the PCAOB and are
required to be independent with respect to the Company in accordance with the U.S. federal securities laws and the applicable
rules and regulations of the Securities and Exchange Commission and the PCAOB.
We conducted our audits in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether the financial statements are free of material misstatement, whether due to error
or fraud. Our audits included performing procedures to assess the risks of material misstatement of the financial statements, whether
due to error or fraud, and performing procedures that respond to those risks. Such procedures included examining, on a test basis,
evidence regarding the amounts and disclosures in the financial statements. Our audits also included evaluating the accounting
principles used and significant estimates made by management, as well as evaluating the overall presentation of the financial
statements. We believe that our audits provide a reasonable basis for our opinion.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 22, 2019
We have served as the Company’s auditor since 2011.
71
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the stockholders and the Board of Directors of CyrusOne Inc.
Dallas, TX
Opinion on Internal Control over Financial Reporting
We have audited the internal control over financial reporting of CyrusOne Inc. (the "Company") as of December 31, 2018, based
on criteria established in Internal Control - Integrated Framework (2013) issued by the Committee of Sponsoring Organizations
of the Treadway Commission. In our opinion, the Company maintained, in all material respects, effective internal control over
financial reporting as of December 31, 2018, based on the criteria established in -Internal Control - Integrated Framework (2013)
issued by COSO.
We have also audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States)
(PCAOB), the consolidated financial statements as of and for the year ended December 31, 2018, of the Company and our report
dated February 22, 2019, expressed an unqualified opinion on those financial statements, and includes an explanatory paragraph
regarding the adoption of Financial Accounting Standards Board Account Standards Update No. 2016-01, Financial Instruments
- Overall (Subtopic 825-10).
Basis for Opinion
The Company’s management is responsible for maintaining effective internal control over financial reporting and for its assessment
of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Annual Report on
Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Company’s internal control over
financial reporting based on our audit. We are a public accounting firm registered with the PCAOB and are required to be independent
with respect to the Company in accordance with the U.S. federal securities laws and the applicable rules and regulations of the
Securities and Exchange Commission and the PCAOB.
We conducted our audit in accordance with the standards of the PCAOB. Those standards require that we plan and perform the
audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material
respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material
weakness exists, testing and evaluating the design and operating effectiveness of internal control based on the assessed risk, and
performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable
basis for our opinion.
Definition and Limitations of Internal Control over Financial Reporting
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability
of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted
accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain
to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets
of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial
statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable
assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that
could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also,
projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because
of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ Deloitte & Touche LLP
Dallas, Texas
February 22, 2019
72
CYRUSONE INC.
Consolidated Balance Sheets
IN MILLIONS, except share and per share amounts
As of December 31,
Assets
Investment in real estate:
Land
Buildings and improvements
Equipment
Gross operating real estate
Less accumulated depreciation
Net operating real estate
Construction in progress, including land under development
Land held for future development
Total investment in real estate, net
Cash and cash equivalents
Rent and other receivables (net of allowance for doubtful accounts of $1.7 and $2.1
as of December 31, 2018 and December 31, 2017, respectively)
Equity investments
Goodwill
Intangible assets (net of accumulated amortization of $166.9 and $136.1 as of
December 31, 2018 and December 31, 2017, respectively)
Other assets
Total assets
Liabilities and equity
Debt, net
Capital lease obligations and lease financing arrangements
Construction costs payable
Accounts payable and accrued expenses
Dividends payable
Deferred revenue and prepaid rents
Deferred tax liability
Total liabilities
Commitment and contingencies
Stockholders' equity
Preferred stock, $.01 par value, 100,000,000 authorized; no shares issued or
outstanding
Common stock, $.01 par value, 500,000,000 shares authorized and 108,329,314 and
96,137,874 shares issued and outstanding at December 31, 2018 and December 31,
2017, respectively
Additional paid in capital
Accumulated deficit
Accumulated other comprehensive income (loss)
Total stockholders’ equity
Total liabilities and equity
$
$
$
2018
2017
$
118.5 $
1,677.5
2,630.2
4,426.2
(1,054.5)
3,371.7
744.9
176.4
4,293.0
64.4
106.2
198.1
455.1
235.7
240.0
5,592.5 $
2,624.7 $
156.7
195.3
121.3
51.0
148.6
68.9
3,366.5
104.6
1,371.4
1,813.9
3,289.9
(782.4)
2,507.5
487.1
63.8
3,058.4
151.9
87.2
175.6
455.1
203.0
180.9
4,312.1
2,089.4
142.0
115.5
97.9
41.8
111.6
—
2,598.2
—
—
1.1
2,837.4
(600.2)
(12.3)
2,226.0
5,592.5 $
1.0
2,125.6
(486.9)
74.2
1,713.9
4,312.1
The accompanying notes are an integral part of the consolidated financial statements.
73
CYRUSONE INC.
Consolidated Statements of Operations
IN MILLIONS, except per share data
For the Year Ended December 31,
Revenue
Operating expenses:
Property operating expenses
Sales and marketing
General and administrative
Depreciation and amortization
Transaction, acquisition, integration and other related expenses
Impairment losses
Total operating expenses
Operating income
Interest expense
Unrealized gain on marketable equity investment
Loss on early extinguishment of debt
Net income (loss) before income taxes
Income tax expense
Net income (loss)
Weighted average number of common shares outstanding - basic
Weighted average number of common shares outstanding - diluted
Income (loss) per share - basic
Income (loss) per share - diluted
2018
2017
2016
$
821.4 $
672.0 $
529.1
292.4
19.6
80.6
334.1
5.0
—
731.7
89.7
(94.7)
9.9
(3.1)
1.8
(0.6)
1.2 $
99.8
100.4
— $
— $
235.1
17.0
67.0
258.9
11.9
58.0
647.9
24.1
(68.1)
—
(36.5)
(80.5)
(3.0)
(83.5) $
88.9
88.9
(0.95) $
(0.95) $
187.5
16.9
60.7
183.9
4.6
5.0
458.6
70.5
(48.8)
—
—
21.7
(1.8)
19.9
78.3
79.0
0.24
0.24
$
$
$
The accompanying notes are an integral part of the consolidated financial statements.
74
CYRUSONE INC.
Consolidated Statements of Comprehensive Income (Loss)
IN MILLIONS
For the Year Ended December 31,
Net income (loss)
Other comprehensive income (loss):
Foreign currency translation adjustment
Unrealized gain on equity investment
Comprehensive income (loss)
2018
2017
2016
1.2 $
(83.5) $
19.9
(10.9)
—
(9.7) $
(0.1)
75.6
(8.0) $
(0.9)
—
19.0
$
$
The accompanying notes are an integral part of the consolidated financial statements.
75
CYRUSONE INC.
Consolidated Statements of Equity
IN MILLIONS
Balance as of January 1, 2016
Net income
Stock-based compensation expense
Tax payment upon exercise of equity awards
Issuance of common stock
Foreign currency translation adjustments
Dividends declared, $1.52 per share
Balance as of December 31, 2016
Net loss
Stock-based compensation expense
Tax payment upon exercise of equity awards
Issuance of common stock
Foreign currency translation adjustment
Unrealized gain on equity investment
Dividends declared, $1.68 per share
Balance as of December 31, 2017
Adoption of accounting standards:
Revenue recognition, cumulative modified retrospective
Financial instruments (equity investment), cumulative adjustment
Issuance of common stock, net
Net income
Stock-based compensation expense
Tax payment upon exercise of equity awards
Foreign currency translation adjustment
Dividends declared, $1.84 per share
Balance at December 31, 2018
Shares of
common
stock
outstanding
Common
Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated
Other
Comprehensive
Income (Loss)
Total
Stockholders'
Equity
72.6 $
0.7 $
967.2 $
(145.9) $
(0.4) $
821.6
—
0.6
(0.5)
10.8
—
—
—
—
—
0.1
—
—
—
12.3
(14.2)
447.0
—
—
19.9
—
—
—
—
(123.8)
—
—
—
—
(0.9)
—
19.9
12.3
(14.2)
447.1
(0.9)
(123.8)
83.5 $
0.8 $
1,412.3 $
(249.8) $
(1.3) $
1,162.0
—
(0.1)
(0.1)
12.8
—
—
—
—
—
—
0.2
—
—
—
—
14.7
(6.9)
705.5
—
—
—
(83.5)
—
—
—
—
—
(153.6)
—
—
—
—
(0.1)
75.6
—
(83.5)
14.7
(6.9)
705.7
(0.1)
75.6
(153.6)
96.1 $
1.0 $
2,125.6 $
(486.9) $
74.2 $
1,713.9
—
—
12.3
—
—
(0.1)
—
—
—
—
0.1
—
—
—
—
—
—
—
699.5
—
17.5
(5.2)
—
—
0.3
75.6
—
1.2
—
—
—
(190.4)
—
(75.6)
—
—
—
—
(10.9)
—
0.3
—
699.6
1.2
17.5
(5.2)
(10.9)
(190.4)
108.3 $
1.1 $
2,837.4 $
(600.2) $
(12.3) $
2,226.0
The accompanying notes are an integral part of the consolidated financial statements.
76
CYRUSONE INC.
Consolidated Statements of Cash Flows
IN MILLIONS
For the Year Ended December 31,
Cash flows from operating activities:
Net income (loss)
Adjustments to reconcile net income (loss)to net cash provided by operating activities:
Depreciation and amortization
Provision for bad debt expense
Impairment losses
Unrealized gain on marketable equity investment
Loss on early extinguishment of debt
Interest expense amortization, net
Stock-based compensation expense
Other
Change in operating assets and liabilities:
Rent and other receivables, net and other assets
Accounts payable and accrued expenses
Deferred revenue and prepaid rents
Net cash provided by operating activities
Cash flows from investing activities:
Asset acquisitions, primarily real estate, net of cash acquired
Investment in real estate
Equity investments
Net cash used in investing activities
Cash flows from financing activities:
Issuance of common stock, net
Dividends paid
Proceeds from debt, net
Payments on debt
Payments on capital lease obligations and lease financing arrangements
Interest paid by lenders on issuance of the senior notes
Tax payment upon exercise of equity awards
Net cash provided by financing activities
Effect of exchange rate changes on cash, cash equivalents and restricted cash
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
Cash, cash equivalents and restricted cash at end of period
Supplemental disclosure of cash flow information:
Cash paid for interest, including amounts capitalized of $24.4 million, $17.0 million and $10.6
million in 2018, 2017 and 2016, respectively
Cash paid for income taxes
Non-cash investing and financing activities:
Construction costs and other payables
Dividends payable
Debt assumed in asset acquisition
Capital lease obligation assumed
2018
2017
2016
$
1.2 $
(83.5) $
19.9
334.1
258.9
183.9
2.6
—
(9.9)
3.1
4.0
17.5
(0.6)
(80.2)
3.0
34.5
309.3
(462.8)
(865.7)
(12.6)
0.2
58.0
—
36.5
4.2
14.7
1.5
(64.3)
29.3
34.0
289.5
(492.3)
(914.5)
(100.0)
(1,341.1)
(1,506.8)
699.6
(181.1)
1,988.3
(1,547.4)
(9.5)
—
(5.2)
944.7
(0.4)
(87.5)
151.9
705.7
(145.7)
2,558.4
(1,749.8)
(9.8)
2.7
(6.9)
1,354.6
—
137.3
14.6
$
$
64.4 $
151.9 $
115.4 $
3.4
68.8 $
2.2
195.3
51.0
86.3
25.0
115.5
41.8
—
2.2
1.6
5.0
—
—
4.9
12.3
0.3
(51.7)
6.9
(2.5)
180.6
(131.1)
(600.0)
—
(731.1)
447.1
(114.3)
701.3
(461.5)
(9.1)
—
(14.2)
549.3
—
(1.2)
15.8
14.6
55.0
1.2
132.7
33.9
—
—
The accompanying notes are an integral part of the consolidated financial statements.
77
CYRUSONE INC.
Notes to Consolidated Financial Statements
1. Description of Business
CyrusOne Inc., together with CyrusOne GP (the "General Partner"), a wholly-owned subsidiary of CyrusOne Inc., through which
CyrusOne Inc. wholly owns CyrusOne LP (the "Operating Partnership") and the subsidiaries of the Operating Partnership
(collectively, “CyrusOne”, “we”, “us”, “our”, and the “Company”) is an owner, operator and developer of enterprise-class, carrier-
neutral, multi-tenant and single-tenant data center properties. Our customers operate in a number of industries, including information
technology, financial services, energy, oil and gas, mining, medical and consumer goods and services. We currently operate 48
data centers and two recovery centers located in the United States, United Kingdom, Germany and Singapore.
On January 24, 2013, the Company completed its initial public offering (the "IPO") of common stock and its common stock
currently trades on the NASDAQ Exchange under the ticker symbol "CONE". As of December 31, 2018, all of the issued and
outstanding Operating Partnership units of CyrusOne LP are owned, directly or indirectly, by the Company.
2. Basis of Presentation
The accompanying financial statements are prepared on a consolidated basis. In addition, the accompanying financial statements
have been prepared in accordance with generally accepted accounting principles in the U.S. (GAAP) and include the accounts of
the Company, as well as all wholly-owned subsidiaries and any consolidated variable interest entities. All intercompany transactions
and balances have been eliminated in consolidation.
3. Summary of Significant Accounting Policies
Investment in Real Estate
Acquisition of Properties
Investment in real estate consist of land, buildings, improvements and integral equipment utilized in our data center operations.
We expect most acquisitions to be an acquisition of assets rather than a business combination as our typical acquisitions consist
of properties whereby substantially all the fair value of gross assets acquired is concentrated in a single asset set (land, building
and in-place leases), which are treated as asset acquisitions. See Business Combinations and Asset Acquisitions herein.
Business Combinations and Asset Acquisitions
We evaluate whether an acquisition is a business combination or an asset acquisition by determining whether the set of assets is
a business.
Asset Acquisitions
When substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar
identifiable assets, the transaction is accounted for as an asset acquisition. Asset acquisitions are recorded at the cumulative
acquisition costs and allocated to the assets acquired and liabilities assumed on a relative fair value basis. The Company allocates
the purchase price of real estate to identifiable tangible assets such as land, building, land improvements and tenant improvements
acquired based on their fair value. In estimating the fair value of each component management considers appraisals, replacement
cost, its own analysis of recently acquired and existing comparable properties, market rental data and other related information.
Transaction costs associated with asset acquisitions are capitalized.
Business Combinations
When substantially all of the fair value is not concentrated in a group of similar identifiable assets, the set of assets will generally
be considered a business and the Company applies the purchase method for business combinations, where all tangible and
identifiable intangible assets acquired and all liabilities assumed are recorded at fair value. Any excess purchase price is recorded
as goodwill. Transaction costs associated with business combinations are expensed as incurred.
The following discussion applies to our initial determination of fair value and the resulting subsequent accounting which is generally
applicable to both asset acquisitions and business combinations.
The fair value of any tangible real estate assets acquired is determined by valuing the building as if it were vacant, and the fair
value is then allocated to land, buildings, equipment and improvements. Land values are derived from appraisals, and building
and equipment values are calculated as replacement cost less depreciation or estimates of the relative fair value of these assets
using net operating income capitalization rates, discounted cash flow analysis or similar methods.
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CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
We determine in-place lease values based on our evaluation of the specific characteristics of each tenant’s lease agreement and by
applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected
lease up periods for the respective leasable area considering current market conditions. In estimating fair value of in-place leases,
we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses
to execute similar leases as well as projected rental revenue and carrying costs during the expected lease up period. We amortize
the value of in-place leases acquired to expense over the approximate weighted average remaining term of the leases, adjusted for
projected tenant turnover, on a composite basis.
We determine the value of above-market and below-market in-place leases for acquired properties based on the present value
(using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual
amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place
leases, measured over a period equal to (i) the remaining non-cancellable lease term for above-market leases, or (ii) the remaining
non-cancellable lease term plus any fixed rate renewal options for below-market leases. We record the fair value of above-market
and below-market leases as intangible assets or liabilities, and amortize them as an adjustment to revenue over the lease term.
We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service payments using
current market-based terms for interest rates for debt with similar terms that management believes we could obtain on similar
maturities. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and
amortized over the remaining life of the loan.
Capitalization of Costs
We capitalize costs directly related to the development, pre-development or improvement of our investment in real estate, referred
to as capital projects and other activities included within this paragraph. Costs associated with our capital projects are capitalized
as incurred. If the project is abandoned, these costs are expensed during the period in which the project is abandoned. Costs
considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes, insurance, utilities and
lease expense, if appropriate. We capitalize indirect costs such as personnel, office and administrative expenses that are directly
related to our development projects based on an estimate of the time spent on the construction and development activities. These
costs are capitalized only during the period in which activities necessary to ready an asset for its intended use are in progress and
such costs are incremental and identifiable to a specific activity to get the asset ready for its intended use. We determine when the
capitalization period begins and ends through communication with project and other managers responsible for the tracking and
oversight of individual projects. In the event that the activities to ready the asset for its intended use are suspended, the capitalization
period will cease until such activities are resumed. In addition, we capitalize initial direct costs incurred for successful origination
of new leases. Costs incurred for maintaining and repairing our properties, which do not extend their useful lives, are expensed as
incurred. Interest expense is capitalized based on actual qualifying capital expenditures from the period when development
commences until the asset is ready for its intended use, at the weighted average borrowing rate during the period. These costs are
included in investment in real estate and depreciated over the estimated useful life of the related assets.
Impairment Losses
When events or circumstances indicate that the carrying amount of a real estate investment may not be recoverable, we review
the carrying value of the asset. When such impairment indicators exist, we review an estimate of the undiscounted future cash
flows expected to result from the use of the asset and its eventual disposition and compare such amount to its carrying amount. If
our undiscounted cash flows indicate that we are unable to recover the carrying value of the real estate investment, an impairment
loss is recognized. An impairment loss is measured as the amount by which the real estate investment's carrying value exceeds its
estimated fair value. We did not record any impairment losses for the year ended December 31, 2018 and recorded impairment
losses of $58.0 million for the year ended December 31, 2017 related to our leased data center facilities in the Connecticut markets
and our leased data center facility in Singapore. For the year ended December 31, 2016, we recorded impairment losses of $5.0
million related primarily to two properties, South Bend - Crescent, a leased facility, and Cincinnati - Goldcoast, an owned facility.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-
term investments with original maturities of three months or less. Restricted cash includes cash equivalents held in our name to
collateralize standby letters of credit or its use is restricted by contract or regulation.
Equity Investment
We hold investments in various joint ventures where the Company evaluates its ability to influence the operating or financial
decisions of the investee in applying the appropriate method of accounting for such investments. Influence tends to be more
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CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
effective as the investor's percent of ownership in the voting rights of the investee increases. Our equity investments represent
less than 20% of the voting rights of the investees and we do not exercise influence over the operating and financial decisions.
Accordingly, we do not account for our equity investments using the equity method accounting. For further information about our
equity investments, see Note 9. Equity Investments.
Our investment in GDS Holdings Limited (“GDS”) is classified as “available for sale” and is carried at fair value. Effective
beginning January 1, 2018, changes in the fair value are reported as a component of net income (loss). Prior to January 1, 2018,
such changes in fair value were reported as a component of comprehensive income (loss). See “Recently Adopted Accounting
Pronouncements” section below.
Our other equity investment is carried at cost because we do not exercise influence over the operating and financial decisions of
the venture and there is no readily determinable fair value and our investment is recorded at cost less impairment, if any. Dividends
paid from operating profits are reported as a component of net income (loss), while other dividends are reported as a return of
capital.
Goodwill
We evaluate goodwill for possible impairment at least annually or upon the occurrence of events or circumstances that indicate
that they would more likely than not reduce the fair value of a reporting unit below its carrying amount.
For our annual impairment evaluation, we have the option of performing a qualitative or quantitative goodwill impairment analysis.
A qualitative analysis, step zero, analyzes the macro-economic environment in which we operate for any significant changes such
as deterioration in the market that the Company operates or overall financial performance such as declining cash flows. Also, entity
specific changes are analyzed such as change in management, strategy or composition of reporting unit. This assessment of
qualitative factors serves as a basis for determining whether it is necessary to perform the step one test. A quantitative analysis,
step one, requires the Company to estimate the fair value of the reporting unit and compare the fair value to the carrying value to
identify whether the value of the recorded goodwill is impaired. Changes in certain assumptions could have a significant impact
on the impairment test for goodwill under step one. The most critical assumptions are projected future growth rates, operating
margins, capital expenditures, tax rates, terminal values and discount rates. These assumptions are subject to change as our long-
term plans and strategies are updated each year.
During the fourth quarters of 2018, 2017 and 2016, we applied step zero and determined that the fair value of the reporting unit
is substantially in excess of the carrying amount and therefore determined that incremental goodwill impairment testing was not
necessary.
Rent and Other Receivables
Receivables consist principally of trade receivables from customers with expected credit losses recorded as an allowance for
doubtful accounts. The allowance for doubtful accounts is estimated based upon historic patterns of credit losses for aged receivables
as well as specific provisions for certain identifiable, potentially uncollectible balances.
Deferred Revenue and Prepaid Rents
Deferred revenue is recorded when a customer makes a contractual payment in excess of revenues recognized in accordance with
GAAP. Prepaid rent liability is recorded when a customer makes an advance payment or they are contractually obligated to pay
any amounts in advance of the associated lease or service period.
Lease Financing Arrangements
Lease financing arrangements represent leases of real estate where we are involved in the construction of structural improvements
to develop buildings into data centers. When we bear substantially all the construction period risk, such as managing or funding
construction, we are deemed to be the accounting owner of the leased property and, at the lease inception date, we are required to
record at fair value the property and associated liability on our consolidated balance sheets. These transactions generally do not
qualify for sale-leaseback accounting due to our continued involvement in these data center operations.
Revenue Recognition
Our leasing revenue primarily consists of colocation rent, metered power reimbursements and interconnection revenue. We
generally are not entitled to reimbursements for rental expenses including real estate taxes, insurance or other common area
operating expenses. The revenues from colocation rent revenue, metered power reimbursements and interconnection are recognized
under the lease accounting standard and managed services, equipment sales, installations and other services are recognized under
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CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
the revenue accounting standard. An allowance for doubtful accounts is recognized when the collection of trade receivables is
deemed to be unlikely.
Colocation Rent Revenue and Metered Power Reimbursements Revenue
Colocation rent revenues are generally billed monthly in advance based on the contracted power or leased space. Some contracts
may provide initial free rent periods and rents that escalate over the term of the contract. If rents escalate without the lessee gaining
access to or control over additional leased power or space, at the beginning of the lease term, the rental payments are recognized
as revenue on a straight-line basis over the term of the lease. If rents escalate because the lessee gains access to and control over
additional power and or leased space, revenue is recognized in proportion to the additional power or space in the periods that the
lessee has control over the use of the additional space or power. The excess of revenue recognized over amounts contractually due
is recognized as a straight-line receivable, which is included in other assets in our consolidated balance sheet. When customers
make an advance payment in connection with a lease period or contractual obligation, deferred revenue is recorded.
Some of our leases are structured on a full-service gross basis in which the customer pays a fixed amount for both colocation rent
and power. The revenue for these types of leases is recorded in colocation lease revenue. Other leases provide that the customer
is separately billed for power based upon actual or estimated metered usage. Metered power reimbursement revenue is generally
billed one month in arrears, and an estimate of this revenue is accrued in the month that the associated power is provided and
recorded in Metered power reimbursements on the Consolidated Statement of Operations.
Revenue from Contracts with Customers
We adopted the new revenue recognition standard effective January 1, 2018. The information in this section describes our current
revenue recognition policies. See Note 4, Recently Adopted Accounting Pronouncements, for additional information related to the
adoption.
Service Revenue
Managed services include the provisioning of a full-service managed data center, monitoring customer computer equipment,
managing backups and storage, utilization reporting and other related ancillary information technology services. Management
service contracts generally range from one to five years. Other services generally include installation of customer equipment,
performing customer system re-boots, server cabinet and cage management, power monitoring, shipping and receiving, resolving
technical issues, and other services requested by the customer. Installation services include mounting, wiring, and testing of
customer owned equipment. The installation period is typically short term in duration, and accordingly, revenue from the installation
of customer equipment is recognized at a point-in-time once the installation is complete and the performance obligation is satisfied.
Service revenue is measured based on the consideration specified in the contract and recognized over time as we satisfy the
performance obligation.
As allowed under GAAP, we have adopted the practical expedient that allows us not to disclose information about remaining
performance obligations that have original expected durations of one year or less, the amount of the transaction price allocated to
the remaining performance obligations and when we expect to recognize that amount as revenue for the year. We have also adopted
the “as invoiced” practical expedient, whereby the Company recognizes revenue in the amount that directly corresponds to the
amount of value transferred to the customer.
Depreciation and Amortization Expense
Depreciation expense is recognized over the estimated useful lives of real estate applying the straight-line method. The useful life
of leased real estate and leasehold improvements is the lesser of the economic useful life of the asset or the term of the lease,
including optional renewal periods if renewal of the lease is reasonably assured.
Amortization expense is recognized over the estimated useful lives of finite-lived intangibles. Finite-lived intangibles include
trademarks, customer relationships, favorable leasehold interests, in-place leases, trade names and deferred leasing costs. See Note
10, Goodwill, Intangible and Other Long-Lived Assets, for details.
Foreign Currency Translation and Transactions
Gains or losses from translation of foreign operations where the local currency is the functional currency are included as components
of other comprehensive income (loss). The financial position of foreign subsidiaries is translated at the exchange rates in effect at
the end of the period, while revenues and expenses are translated at average exchange rates during the period. Gains or losses
from foreign currency transactions are included in determining net income (loss).
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CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Stock-Based Compensation
We have a stock-based incentive award plan for our employees and directors. Stock-based compensation expense associated with
these awards is recognized in general and administrative expenses, property operating expenses and sales and marketing in our
consolidated statements of operations. We measure stock-based compensation at the estimated fair value on the grant date and
recognize the amortization of stock-based compensation expense over the requisite service period. Fair value is determined based
on assumptions related to volatility, interest rates and our market and company performance.
Fair Value Measurements
Fair value measurements are utilized in accounting for business combinations, asset acquisitions, testing of goodwill and other
long-lived assets for impairment, recording unrealized gain/loss on available-for-sale securities and disclosures. Fair value of
financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell
an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy for inputs used
in measuring fair value, which prioritizes the inputs used in the methodologies of measuring fair value for asset and liabilities, is
as follows:
Level 1—Observable inputs for identical instruments such as quoted market prices;
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar
assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e.,
interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation
or other means (market corroborated inputs); and
Level 3—Unobservable inputs that reflect our determination of assumptions that market participants would use in pricing the asset
or liability. These inputs are developed based on the best information available, including our own data.
Segment Information
Our data centers have similar revenues and operating expenses across all geographic locations. The service offerings and delivery
of services are provided in a similar manner, using the same types of facilities and similar technologies. Our chief operating decision
maker, the Company's Chief Executive Officer, reviews our financial information on an aggregate basis and as a result, we have
one reportable business segment.
One customer represented approximately 18% of our revenue for the years ended December 31, 2018 and 2017.
Revenues from properties were $821.4 million, $672.0 million and $529.1 million for the years ended December 31, 2018, 2017
and 2016, respectively. We had net investment in real estate of $4.3 billion and $3.1 billion, at December 31, 2018 and 2017,
respectively.
Use of Estimates
Preparation of the consolidated financial statements in conformity with GAAP requires management to make estimates and
assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. These estimates
and assumptions are based on management’s knowledge of current events and actions that we may undertake in the future. Significant
estimates include and are related to determining lease terms and revenue recognition, the fair value for purchase price allocations
for business combinations and asset acquisitions, and the useful lives of real estate and other long-lived assets. Actual results may
differ from these estimates and assumptions.
Reclassifications
Certain financial information has been revised to conform to the current year presentation due to changes in the significance of
the particular activity. The following items have been reclassified:
Balance Sheet as of December 31, 2017
• Land related to construction in progress ($8.7 million) and land held for future development ($63.8 million) were previously
included in investment in real estate - land ($72.5 million).
• Notes receivable and long-term installment contracts are classified within other assets. These items were previously
included in rent and other receivables ($3.3 million).
• Construction costs payable are classified in a separate liability and were previously included in accounts payable and
accrued expenses ($115.5 million).
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Notes to Consolidated Financial Statements - (continued)
• Dividends payable are classified in a separate liability and were previously included in accounts payable and accrued
expenses ($41.8 million).
• Lease finance arrangements are classified in capital lease obligations and lease financing arrangements. These items were
previously included in a separate line for lease finance arrangements ($131.9 million).
• Equity investment is classified in a separate asset account and was previously included in other assets ($175.6 million).
Statement of Cash Flows for the year ended December 31, 2017
• The cash flow effect of the change in interest accrual is classified within accounts payable and accrued expenses. These
items were previously combined with non-cash interest expense, net in the comparable prior year period ($12.3 million).
• Debt issuance and debt extinguishment costs are classified within proceeds from debt, net. These items were previously
included in separate lines, debt issuance costs ($19.0 million) and payment of debt extinguishment costs ($30.4 million),
in the comparable prior year period.
Statement of Cash Flows for the year ended December 31, 2016
• The cash flow effect of the change in interest accrual is classified within accounts payable and accrued expenses. These
items were previously combined with non-cash interest expense, net in the comparable prior year period ($1.3 million).
• Debt issuance costs are classified within proceeds from debt, net. This item was previously included in a separate line,
debt issuance costs ($8.7 million) in the comparable prior year period.
• The note payment is classified within payments on debt. This item was previously included in a separate line, payment
of note payable ($8.7 million) in the comparable prior year period.
4. Recently Issued Accounting Standards
Recently Adopted Accounting Pronouncements
On January 1, 2018, we adopted the Financial Accounting Standards Board ("FASB") pronouncement Accounting Standards
Update ("ASU") 2014-09 with respect to revenue recognition. The revised guidance outlines a single comprehensive model for
entities to use in accounting for revenue arising from contracts with customers and superseded prior revenue recognition guidance,
including industry-specific revenue guidance. The revised guidance replaced most existing revenue and real estate sale recognition
guidance in GAAP. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however,
our revenue accounting for managed services and sales of real estate and equipment will follow the revised guidance. We adopted
the new standard using the modified retrospective transition method, where financial statement presentations prior to the date of
adoption are not adjusted. Transactions that were not closed as of the adoption date were adjusted to reflect the new standard and
we recorded an adjustment to beginning retained earnings of $0.3 million. See Note 5 "Revenue Recognition" for further information
regarding the adoption of the new accounting standard, including expanded quantitative and qualitative disclosures regarding
revenue recognition.
On January 1, 2018, we adopted ASU 2017-05, which requires the derecognition of a business in accordance with Accounting
Standards Codification ("ASC") 810, Consolidations, including instances in which the business is considered in substance real
estate. In cases where a controlling interest in real estate was sold but a noncontrolling interest is retained, we may record a gain
or loss related to both the sold and retained interests. The adoption of this standard did not have an impact on our condensed
consolidated financial statements, but depending on future transactions, may in the future.
On January 1, 2018, we adopted ASU 2016-01 related to equity investments. Equity investments (except those accounted for under
the equity method of accounting or those that result in consolidation of the investee) are to be measured at fair value with changes
in fair value now recognized in net income. Previously changes in fair value for available for sale equity investments were recorded
in other comprehensive income (loss). The adoption of the new standard was made through a cumulative-effect adjustment to
beginning retained earnings of $75.6 million. Prior financial statement amounts were not adjusted. For the year ended December 31,
2018, the unrealized gain on investment was $9.9 million.
New Accounting Pronouncements
In August 2018, the Securities and Exchange Commission ("SEC") issued Securities Act Release No. 33-10532, Disclosure Update
and Simplification, which amends certain of its disclosure requirements and is intended to facilitate the disclosure of information
to investors and simplify compliance without significantly altering the total mix of information provided to investors. The
amendments became effective on November 5, 2018. Among the amendments is the requirement to present the changes in
shareholders’ equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form
10-Q. Based on the effective date of the amendments and Exchange Act Forms Compliance and Disclosure Interpretation Question
105.09 issued by the staff of the SEC’s Division of Corporation Finance on September 25, 2018 and updated on October 4, 2018,
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Notes to Consolidated Financial Statements - (continued)
the Company’s first presentation of changes in shareholders’ equity will be in its Form 10-Q for the quarter ending March 31,
2019.
In August 2018, the FASB issued ASU 2018-15, which clarifies the accounting for implementation costs incurred in a hosting
arrangement that is a service contract. Capitalization of these implementation costs are accounted for under the same guidance as
implementation costs incurred to develop or obtain internal-use software and recorded as a prepaid asset. These capitalized costs
are to be expensed ratably over the hosting arrangement term as operating expense, along with the service fees. The guidance is
effective for periods beginning after December 15, 2019. Early adoption is allowed. The Company does not plan to early adopt
this guidance and is evaluating the impact of the new standard.
In August 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820.
Under this ASU, key provisions include new, eliminated and modified disclosure requirements. The guidance is effective for
periods beginning after December 15, 2019. Early adoption is allowed. The Company does not plan to early adopt this guidance
and is evaluating the impact of the new standard.
In June 2018, the FASB issued ASU 2018-07, which simplifies the accounting for share-based payments granted to nonemployees
for goods and services. Under this ASU, most of the guidance on such payments to nonemployees would be aligned with the
requirements for share-based payments granted to employees. The Company accounts for its share-based payments to our board
of director members in the same manner as employees. Other than to our board of director members, the Company does not award
share-based payments to any other nonemployees. Therefore, we do not expect this accounting pronouncement to significantly
impact our financial statements. The guidance is effective for periods beginning after December 15, 2018. Early adoption is allowed.
In February 2016, the FASB issued ASU 2016-02, regarding the accounting for leases for both lessees and lessors. In July 2018,
ASU 2016-02 was amended, providing another transition method by allowing companies to initially apply the new lease standard
in the year of adoption and not the earliest comparative period. The lease standard amendment also provided a practical expedient
for an accounting policy election for lessors, by class of underlying asset, to not separate nonlease components from the associated
lease components as long as the timing and pattern of transfer are the same for the nonlease and lease components.
Lessees will recognize a right-of-use asset and a lease liability for leases (other than leases that meet the definition of a short-term
lease). The liability will be equal to the present value of lease payments adjusted for any initial direct costs of the lease, lease
incentives or early lease payments. For income statement purposes, the FASB retained a dual classification model, requiring lessees
to classify leases as either operating or finance. Operating leases will result in straight-line rent expense (similar to current operating
leases) while finance leases will result in interest and amortization expense (similar to current capital leases). Classification will
be based on criteria that are largely similar to those applied in current lease accounting. The new standard may be adopted using
a modified retrospective transition and provides for certain practical expedients. We are evaluating the impact of ASU 2016-02
on our consolidated financial statements, where we believe the primary impact as a lessee will relate to leases in which we are
deemed to be the accounting owner due to our involvement in the construction of the assets. Previously, under the old standard,
these assets were capitalized as investments in real estate and a related financing obligation was recorded. Under the new standard,
these assets and liabilities will be removed from the Company’s balance sheet and we will record a right-of-use asset and a
corresponding lease liability. Additionally, under the new standard, a right-of-use asset and corresponding lease liability will be
recorded for leases currently treated as operating leases.
The accounting for lessors will remain largely unchanged from current GAAP; however, the new lease standard requires that
lessors expense, on an as-incurred basis, certain initial direct costs that are not incremental in negotiating a lease. Under existing
standards, these costs are capitalizable and therefore the new lease standard will result in certain of these costs being expensed as
incurred after adoption. During the twelve months ended December 31, 2018 and 2017, we capitalized $1.7 million and $0.9
million, respectively, of internal costs related to our leasing activities. Further under current lessor accounting, a real estate lease
could only be a sales-type lease if ownership of the real estate was transferred to the lessee. With the adoption of ASU 2016-02,
there will no longer be an exclusion for real estate leases, where the same classification guidance applies to all leases. If, as lessor,
our real estate leases would be classified as sales-type leases, the real estate asset would be eliminated, a net investment asset
would be recognized generally equal to the present value of the minimum lease payments plus the unguaranteed residual value
and a selling profit or loss. We are required to adopt ASU 2016-02 January 1, 2019, and plan to use the modified retrospective
approach.
In January 2018, the FASB issued ASU 2018-01, which permits an entity to elect a practical expedient to not evaluate land easements
that were not previously accounted for as leases prior to the entity’s adoption of the new lease accounting standard. Once the new
lease standard is adopted, it should be applied prospectively to all new or modified land easements. The Company expects to adopt
this new guidance effective January 1, 2019, along with the new lease standard, and will continue to evaluate the impact of this
new guidance until it becomes effective.
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Notes to Consolidated Financial Statements - (continued)
In June 2016, the FASB issued ASU 2016-13 providing guidance which requires certain financial assets to be presented at the net
amount expected to be collected. The guidance affects entities holding financial assets and net investment in leases that are not
accounted for at fair value through net income. The guidance will apply to our trade receivables, notes receivable, net investments
in leases and any other future financial assets that have the contractual right to receive cash that we may acquire in the future. The
guidance is effective for periods beginning for us January 1, 2020. Early adoption is permitted. We are currently evaluating the
impact of the new standard.
5. Revenue Recognition
We have consistently applied our revenue accounting policies to all periods presented in these consolidated financial statements
except for customer equipment installation services. Beginning with our adoption of revenue recognition in ASU 2014-09 on
January 1, 2018 (see Note 3, Summary of Significant Accounting Policies, and Note 4, Recently Issued Accounting Standards),
revenue from the installation of customer equipment is recognized at a point-in-time. The asset being enhanced or installed belongs
to the customer, and the benefits of the installation service are being consumed at the completion of the service. Prior to the adoption
of the new revenue recognition standard, the revenue from these transactions was deferred over the contract term. The deferred
revenue liability balance related to completed installations, less any associated deferred costs, as of the date of adoption, calculated
on a cumulative modified retrospective basis was $0.3 million and has been included in the cumulative effective adjustment to
opening retained earnings.
Disaggregation of Revenue
For the year ended December 31, 2018, revenue disaggregated by primary revenue stream is as follows (in millions).
Colocation rent
Metered power
Interconnection revenue
Equipment sales
Other revenue
Revenue
Year Ended
December 31, 2018
Year Ended
December 31, 2017
$
$
644.6 $
104.0
40.0
11.9
20.9
821.4 $
539.8
70.2
34.1
7.3
20.6
672.0
Total revenue from contracts with customers was $34.1 million and $29.1 million for the year ended December 31, 2018 and 2017,
respectively. Lease revenue was $787.3 million and $642.9 million for the year ended December 31, 2018 and 2017, respectively.
Total other revenues from customers generated from operations outside of the United States were insignificant for the year ended
December 31, 2018. For further information see Recently Adopted Accounting Pronouncements, ASU 2014-09.
6. Acquisitions and Purchases of Fixed Assets
Acquisitions of Data Centers
On August 24, 2018, the Company completed its previously announced acquisition of Zenium Topco Ltd. and certain other affiliated
entities ("Zenium"). Zenium is a hyperscale data center provider in Europe with four operating data centers in London and Frankfurt,
and land sites available for development in London and Frankfurt. In connection with the acquisition, and after giving effect to a
post-closing working capital adjustment, the Company paid aggregate cash consideration of approximately $462.8 million, net of
approximately $12.7 million of cash acquired, and assumed outstanding indebtedness of approximately $86.3 million. In the fourth
quarter of 2018, the Company paid approximately $1.0 million related to the post-closing working capital adjustment which is
included above in the aggregate cash consideration. The Company financed the acquisition with proceeds from the $300.0 million
delayed draw term loan included in the 2023 Term Loan and $174.5 million of borrowings under the $1.7 Billion Revolving Credit
Facility (each as defined below). As a result of the acquisition, the Company recognized a $72.7 million deferred tax liability
associated with temporary differences between the book basis of the assets acquired in the transaction.
The Company evaluated the acquisition and determined that substantially all of the fair value of the gross assets was concentrated
in a group of similar identifiable assets and accounted for the transaction as an acquisition of assets.
85
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The consolidated financial statements of CyrusOne Inc. include the operating results of Zenium since the acquisition date, which
was August 24, 2018. The following table summarizes the estimated fair values of all assets acquired at the date of acquisition:
IN MILLIONS
Investment in real estate
Cash and cash equivalents
Rent and other receivables
Intangible assets:
Trade name
Leasehold interest
In-place leases
Other assets
Accounts payable
Deferred revenue
Capital lease obligations
Deferred tax liability
Debt
Net assets acquired attributable to CyrusOne Inc.
Cash acquired
Net cash paid at acquisition
$
$
597.3
12.7
9.0
1.8
1.7
61.5
1.1
(22.3)
(3.3)
(25.0)
(72.7)
(86.3)
475.5
(12.7)
462.8
On February 28, 2017, the Company acquired two data centers located in Raleigh-Durham, North Carolina and Somerset, New
Jersey (the "Sentinel Properties") which was accounted for as an asset acquisition. The Company's aggregate cash consideration
paid totaled approximately $492.3 million, including related acquisition and closing costs. The two properties consist of
approximately 160,000 colocation square feet and approximately 21 megawatts of power capacity.
The following table summarizes the estimated fair values of all assets acquired at the date of acquisition:
IN MILLIONS
Investment in real estate
Cash and cash equivalents
Intangible assets:
Above/Below market leases
In-place leases
Other assets
Accounts payable
Deferred revenue
Capital lease obligation
Net assets acquired attributable to CyrusOne Inc.
Cash acquired
Net cash paid at acquisition
Land for future development
$
$
420.3
3.2
2.3
75.8
2.4
(5.4)
(0.9)
(2.2)
495.5
(3.2)
492.3
During the years ended December 31, 2018 and 2017, the Company purchased approximately 182 acres of land for $182.3 million,
and 209 acres of land for $35.3 million, respectively.
86
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Real Estate Investments and Intangibles and Related Depreciation and Amortization
As of December 31, 2018 and 2017, major components of our real estate investments and intangibles and related accumulated
depreciation and amortization are as follows (in millions):
December 31, 2018
December 31, 2017
Investment in Real
Estate
Intangibles
Investment in Real
Estate
Intangibles
Buildings and
Improvements
Equipment
Customer
Relationships
In Place
Leases
Other
Contractual
Buildings and
Improvements Equipment
Customer
Relationships
In Place
Leases
Other
Contractual
$ 1,677.5 $2,630.2 $
247.1 $ 136.0
19.5
$ 1,371.4 $1,813.9 $
247.1 $
75.9 $
16.1
(481.8)
(572.7)
(137.9)
(21.1)
(7.9)
(418.2)
(364.2)
(123.0)
(7.1)
(6.0)
Cost
Less: accumulated
depreciation and
amortization
Net
$ 1,195.7 $2,057.5 $
109.2 $ 114.9 $
11.6
$
953.2 $1,449.7 $
124.1 $
68.8 $
10.1
87
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
7. Investment in Real Estate
A schedule of our gross investment in real estate follows:
IN MILLIONS
As of December 31,
Dallas - Carrollton
Houston - Houston West I
Northern Virginia - Sterling II
San Antonio III
Cincinnati - 7th Street
Northern Virginia - Sterling V
Somerset I
Dallas - Lewisville
Totowa - Madison
Chicago - Aurora I
Cincinnati - North Cincinnati
Phoenix - Chandler II
Wappingers Falls I
San Antonio I
Houston - Houston West II
Phoenix - Chandler I
Phoenix - Chandler III
Northern Virginia - Sterling I
Raleigh-Durham I
Houston - Galleria
Phoenix - Chandler VI
Northern Virginia - Sterling III
Frankfurt I
Austin II
San Antonio II
Florence
Austin III
Phoenix - Chandler IV
San Antonio IV
Cincinnati - Hamilton
Northern Virginia - Sterling IV
Phoenix - Chandler V
London II
London I
London - Great Bridgewater
Cincinnati - Mason
Stamford - Riverbend
Houston - Houston West III
Norwalk I*
Chicago - Lombard
Stamford - Omega*
Cincinnati - Blue Ash
Totowa - Commerce
South Bend - Crescent
2018
Building and
Improvements
Land
Equipment
Land
2017
Building and
Improvements
Equipment
$
16.1 $
62.2 $
272.5 $
16.1 $
61.8 $
1.4
—
—
0.9
14.5
12.1
—
—
2.4
0.9
—
—
4.6
2.7
10.5
—
6.9
2.1
—
2.4
—
85.2
28.8
40.2
114.1
80.8
125.8
76.8
28.5
32.4
77.9
16.2
11.3
31.7
22.9
58.3
11.4
20.2
79.8
71.0
23.3
22.2
11.2
125.5
23.4
30.3
42.0
11.7
18.4
42.1
43.7
20.0
10.7
25.2
34.1
26.8
20.3
2.9
18.0
13.6
4.7
2.6
0.7
4.1
1.7
2.0
7.0
2.2
3.3
—
—
—
4.6
—
—
—
—
—
—
7.2
—
0.7
—
—
—
—
88
51.1
112.4
99.0
37.4
295.8
91.0
39.6
57.7
132.9
12.4
39.4
22.0
35.3
50.9
68.7
50.8
60.4
75.4
20.2
100.3
61.3
178.8
8.7
60.8
8.4
47.0
43.3
48.2
7.9
76.0
53.4
74.8
26.3
1.2
1.7
7.8
31.4
10.1
8.1
0.7
0.2
1.7
0.2
1.4
—
—
0.9
14.5
9.3
—
—
2.4
0.9
—
—
4.6
2.7
10.5
—
7.0
2.1
—
2.4
—
—
2.0
7.0
2.2
3.3
—
—
—
4.6
—
—
—
—
—
—
7.2
—
0.7
—
—
—
—
85.2
28.8
40.3
110.6
35.7
124.8
76.7
28.5
32.4
77.4
16.2
11.3
31.7
22.8
58.2
11.4
20.0
78.0
68.6
15.7
22.2
—
23.4
29.0
42.0
10.6
18.3
—
50.2
20.0
5.9
—
—
28.4
20.3
2.9
17.9
13.5
4.7
2.6
0.7
4.1
1.7
210.7
49.8
112.3
96.8
33.1
108.8
83.7
37.4
55.1
125.0
9.9
38.9
18.0
34.8
50.1
65.9
50.0
59.4
76.0
17.6
49.2
61.3
—
7.2
60.4
5.3
33.9
40.9
17.9
6.0
73.7
20.5
—
—
1.1
1.6
6.9
30.7
9.4
7.7
0.7
0.2
1.6
0.1
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
IN MILLIONS
As of December 31,
South Bend - Monroe
Chicago - Aurora II
Chicago - Aurora Tower
Dallas - Midway
Dallas - Marsh
Cincinnati - Goldcoast
Northern Virginia - Sterling VI
Total
Land held for future development
2018
Building and
Improvements
Land
Equipment
Land
2017
Building and
Improvements
Equipment
—
2.6
—
—
—
0.2
—
2.5
22.6
4.9
—
—
4.0
—
0.4
68.6
0.4
—
—
0.1
77.5
—
2.6
—
—
—
0.2
—
2.5
8.3
—
2.0
0.1
4.0
—
0.3
42.9
—
0.4
0.6
0.1
—
118.5 $
1,677.5 $
2,630.2 $
104.6 $
1,371.4 $
1,813.9
176.4 $
— $
— $
63.8 $
— $
—
$
$
As of December 31, 2018 and December 31, 2017, construction in progress includes $69.1 million and $8.7 million of land which
is under active development, respectively.
In addition, construction in progress was $744.9 million and $487.1 million as of December 31, 2018 and December 31, 2017,
respectively, as we continue to build data center facilities.
For the year ended December 31, 2018, our capital expenditures were $1,328.5 million, as shown on the statement of cash flows.
This included the purchase price of the properties acquired in the Zenium acquisition on August 24, 2018 for $462.8 million and
$865.7 million for other developments primarily in Chicago, Cincinnati, Dallas, Northern Virginia, Phoenix and San Antonio; and
the purchase of parcels of land in Phoenix, Northern Virginia, Allen, Amsterdam, Santa Clara and Frankfurt for future development.
For the year ended December 31, 2017, our capital expenditures were $1,406.8 million, as shown on the statement of cash flows.
This included the purchase price of the Sentinel Properties on February 28, 2017 for $492.3 million and $914.5 million for other
developments primarily in Chicago, Cincinnati, Dallas, Northern Virginia, Phoenix and San Antonio; and the purchase of parcels
of land in Allen, Texas, Atlanta, Georgia and Quincy, Washington for future development.
No impairment charges were recognized during the year ended December 31, 2018. For the year ended December 31, 2017, we
recognized impairment losses of $58.0 million which includes the impairment loss of $54.4 million as mentioned below and an
impairment of $3.6 million related to our leased facility in Singapore.
During the year ended December 31, 2017, we incurred an impairment loss of $54.4 million for our Norwalk I, Stamford -
Riverbend and Stamford - Omega facilities, which are in the Connecticut market and were acquired as part of the acquisition of
Cervalis, a privately-held owner and operator of data centers, in July 2015. These are leased facilities and Cervalis was deemed
to be the accounting owner of the buildings, excluding land, due to their involvement in the construction of structural improvements
to these facilities and continuing involvement once construction was completed. Upon acquisition of Cervalis, all assets acquired
and liabilities assumed were recorded at their estimated fair values. For new leases, our sales cycle is typically up to two years,
and our revenue and profit expectations were revised as compared to the assumptions contained at the time of the acquisition. Due
to lack of demand we have experienced for data centers in the Connecticut market, we revised our expectations for operations of
these facilities through the end of their lease terms. The amount of impairment recognized was the excess of the carrying value
over the fair value of the assets. Fair value was determined by the discounted cash flow method based on management's best
estimates of a market participant using available information.
89
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
8. Notes Receivable
The carrying amount of notes receivable was $2.1 million and $3.3 million as of December 31, 2018 and 2017, respectively, and
consisted of the following:
IN MILLIONS
For the year ended December 31,
Note 1
Note 2
Note 3
Note 4
Note 5
Total
2018
2017
$
$
1.4 $
0.3
—
0.3
0.1
2.1 $
1.8
0.6
0.5
0.4
—
3.3
Each of the above notes is from a different customer. Note 1 matures in September 2021, and the payments are approximately
$50,000 per month. Note 2 matures in November 2019, and the payments are approximately $26,000 per month. Note 3 matured
in February 2018, and the payments were approximately $30,000 per month. Note 4 matures in October 2020, and the payments
are approximately $12,000 per month. Note 5 matures in June 2021, and the payments are approximately $4,000 per month. These
notes are included in rent and other receivables on the consolidated balance sheets.
9. Equity Investments
The Company has an equity investment, accounted for using the fair value method in GDS, a developer and operator of high-
performance, large-scale data centers in China. On October 18, 2017, the Company purchased newly issued unregistered ordinary
shares equivalent to 8.0 million American depository shares (ADS) at a price per Class A ordinary share equivalent to $12.45 per
ADS, a 4% discount to the October 17, 2017 closing price, for a total investment of $100 million. Each ADS is equivalent to eight
ordinary shares. As of December 31, 2018 the ADS Class A ordinary share equivalent was $23.09 per ADS for a total fair value
of $185.5 million. For the year ended December 31, 2018, the unrealized gain on investment of 9.9 million was recognized in the
Consolidated Statement of Operations in Unrealized gain on marketable equity investment. For further information see Recently
Adopted Accounting Pronouncements, adoption of ASU 2016-01.
On October 8, 2018, the Company made an $11.9 million investment in exchange for a 10% equity interest in ODATA Brasil S.A.
and ODATA Colombia S.A.S. (collectively "ODATA"). ODATA, a Brazilian headquartered company, specializes in providing
colocation services to wholesale customers, such as hyperscale cloud providers, financial services and telecommunications
companies, and also to enterprises across multiple industries. On October 30, 2018, the Company made an additional $0.7 million
investment in ODATA Colombia S.A.S. In connection with these investments, CyrusOne and ODATA entered a commercial
agreement covering leasing activity with CyrusOne customers in the ODATA portfolio. In addition, our Chief Technology Officer
joined the ODATA board of directors in October 2018. In evaluating the appropriate accounting method for its investment in
ODATA, the Company considered its right to appoint a director to the ODATA board of directors, as well as other relevant factors,
in evaluating the Company’s ability to exercise significant influence over the operating and financial policies of ODATA as provided
in ASC 323-10-15-6 and concluded that the investment should be accounted for under the cost method.
90
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
10. Goodwill, Intangible and Other Long-Lived Assets
The carrying amount of goodwill was $455.1 million as of December 31, 2018 and 2017. See Note 6 for the explanation of changes
to intangible assets.
Summarized below are the carrying values for the major classes of intangible assets:
IN MILLIONS
For the year ended December 31,
2018
2017
Weighted-
Average
Remaining
Life
(in years)
Gross
Carrying
Amount
Accumulated
Amortization
Total
Gross
Carrying
Amount
Accumulated
Amortization
Total
Customer relationships
Trademark/tradename
Favorable leasehold interest
In place customer leases
Above and below market leases
11 $
247.1 $
(137.9) $
109.2 $
247.1 $
(123.0) $
124.1
6
36
6
7
11.5
5.7
136.0
2.3
(6.7)
(0.7)
(21.1)
(0.5)
4.8
5.0
114.9
1.8
9.7
4.1
75.9
2.3
(5.3)
(0.5)
(7.1)
(0.2)
4.4
3.6
68.8
2.1
Total
$
402.6 $
(166.9) $
235.7 $
339.1 $
(136.1) $
203.0
There were no goodwill or intangible asset impairments for the years ended December 31, 2018 or 2017.
Amortization expense for acquired intangible assets was $30.6 million, $25.1 million and $20.1 million for the years ended
December 31, 2018, 2017 and 2016, respectively.
The following table presents estimated amortization expense for each of the next five years and thereafter, commencing January
1, 2019:
IN MILLIONS
2019
2020
2021
2022
2023
Thereafter
Total
11. Other Assets
Total
40.2
39.0
31.8
28.5
20.7
75.5
235.7
$
$
As of December 31, 2018 and 2017, the components of other assets are as follows (in millions):
Straight line receivables, net
Deferred leasing and other contract costs
Prepaid expenses
Non-real estate assets, net
Other
Total
December 31, 2018 December 31, 2017
$
$
128.7 $
43.6
26.4
18.4
22.9
240.0 $
100.0
33.7
20.0
16.7
10.5
180.9
Non-real estate assets primarily include administrative related equipment and office leasehold improvements, depreciated or
amortized over the shorter of the assets useful life or the related lease term.
91
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
12. Debt
As of December 31, 2018 and 2017, the components of debt are as follows (unless otherwise noted, interest rate and maturity date
information are as of December 31, 2018) (in millions):
December 31,
2018
December 31,
2017
Interest Rate(a) Maturity Date
$3.0 Billion Credit Facility:
$1.7 Billion Revolving Credit Facility
$
143.0 $
2023 Term Loan
2025 Term Loan
$2.0 Billion Credit Facility:
$1.1 Billion Revolving Credit Facility
2021 Term Loan
2022 Term Loan
2024 Notes, including bond premium of $5.5 million
2027 Notes, including bond premium of $9.1 million
Deferred financing costs
Total
1,000.0
300.0
—
—
—
705.5
509.1
(32.9)
1.45%
— Monthly EURIBOR +
— Monthly LIBOR +
— Monthly LIBOR +
1.40%
1.70%
— Monthly LIBOR +
1.55%
Monthly LIBOR +
1.50%
Monthly LIBOR +
1.50%
250.0
650.0
March 2022(b)
March 2023
March 2025
N/A
N/A
N/A
706.8
510.5
(27.9)
5.000% March 2024
5.375% March 2027
—
—
$
2,624.7 $
2,089.4
(a) - Monthly LIBOR at December 31, 2018 was 2.53%.
(b) - The Company may exercise a one-year extension option, subject to certain conditions.
On March 29, 2018, the Company entered into a new $3.0 billion unsecured credit facility. The new credit facility consists of a
$1.7 billion revolving credit facility ("$1.7 Billion Revolving Credit Facility"), which includes a $750.0 million multicurrency
borrowing sublimit, a 5-year term loan with commitments totaling $1.0 billion ("2023 Term Loan") and a $300.0 million 7-year
term loan ("2025 Term Loan") (collectively, the "$3.0 Billion Credit Facility"). We borrowed $700.0 million under the 2023 Term
Loan on March 31, 2018, and the 2023 Term Loan includes a delayed draw feature which allowed the Company to draw $300.0
million in up to three tranches over a six-month period in multiple currencies. The Company exercised the draw as a part of the
Zenium acquisition. The $1.7 Billion Revolving Credit Facility has the option to borrow in non-USD currencies and includes a
one-year option which, if exercised by the Company, would extend the final maturity to March 2023. The $3.0 Billion Credit
Facility also includes an accordion feature providing for an aggregate increase in the revolving and term components to $4.0
billion, subject to certain conditions. The $1.7 Billion Revolving Credit Facility, and the 2023 and 2025 Term Loans, are prepayable
at our option.
On March 29, 2018, borrowings of $1.0 billion under the $3.0 Billion Credit Facility were used to fully retire a previous $2.0
billion credit facility. The previous $2.0 billion credit facility consisted of a $1.1 billion senior unsecured revolving credit facility
("$1.1 Billion Revolving Credit Facility"), a $250 million 5-year term ("2021 Term Loan") and a $650 million 7-year term loan
("2022 Term Loan") (collectively, the "$2.0 Billion Credit Facility"). The aggregate outstanding principal balance of the $2.0
Billion Credit Facility at the date of the prepayment was $900.0 million and we recognized a loss on early extinguishment of debt
of $3.1 million.
In August 2018, the Company financed the acquisition of Zenium with proceeds from its $300.0 million delayed draw term loan
included in the 2023 Term Loan and $174.5 million of borrowings under the $1.7 Billion Revolving Credit Facility. In connection
with the acquisition, the Company assumed a six-year, €100.0 million construction facility, which was paid off in December 2018.
We pay commitment fees for the unused amount of borrowings on the $1.7 Billion Revolving Credit Facility and fees on any
outstanding letters of credit. The commitment fees are equal to 0.25% per annum of the actual daily amount by which the aggregate
revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations. The commitment fees
decrease to 0.15% per annum upon 50% or greater utilization. We also paid commitment fees on the $1.1 Billion Revolving Credit
Facility through its retirement in March 2018. Commitment fees were $3.8 million, $1.9 million and $1.6 million for the years
ended December 31, 2018, 2017 and 2016, respectively.
As of December 31, 2018, additional borrowing capacity under the $1.7 Billion Revolving Credit Facility was approximately
$1,549.0 million. As of December 31, 2018, we had $8.0 million of outstanding letters of credit issued under our credit facilities.
92
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
On March 17, 2017, the Operating Partnership and CyrusOne Finance Corp., a single-purpose finance subsidiary, both wholly-
owned subsidiaries of the Company (together, the "Note Issuers") completed an offering of $500.0 million aggregate principal
amount of 5.000% senior notes due 2024 ("Original 2024 Notes") and $300.0 million aggregate principal amount of 5.375% senior
notes due 2027 ("Original 2027 Notes") in a private offering. The Company received proceeds of $791.2 million, net of underwriting
costs and other deferred financing costs related to the notes.
On November 3, 2017, the Note Issuers completed an offering of $200.0 million aggregate principal amount of 5.000% senior
notes due 2024 ("Additional 2024 Notes") and $200.0 million aggregate principal amount of 5.375% senior notes due 2027
("Additional 2027 Notes") in a private offering. The Additional 2024 Notes have terms substantially identical to the Original 2024
Notes and the Additional 2027 Notes have terms substantially identical to the Original 2027 Notes. The Original 2024 Notes and
the Additional 2024 Notes form a single class of securities ("2024 Notes"), and the Original 2027 Notes and the Additional 2027
Notes form a single class of securities ("2027 Notes"). The Company received proceeds of $416.1 million, net of underwriting
costs of $4.4 million. The Original 2024 Notes and the Additional 2024 Notes are referred to as the 2024 Notes and the Original
2027 Notes and the Additional 2027 Notes are referred to as the 2027 Notes. On January 8, 2018, the Issuers completed an exchange
offer with respect to the 2024 Notes and the 2027 Notes and all validly tendered 2024 Notes and 2027 Notes were exchanged for
notes registered with the SEC.
The 2024 Notes and 2027 Notes are senior unsecured obligations of the Note Issuers, which rank equally in right of payment with
all existing and future unsecured senior indebtedness of the Note Issuers. The 2024 Notes and 2027 Notes are effectively
subordinated in right of payment to any secured indebtedness of the Note Issuers to the extent of the value of the assets securing
such indebtedness. The senior notes are guaranteed on a joint and several basis by the Company, the General Partner and all of
CyrusOne LP’s existing domestic subsidiaries that guarantee the $3.0 Billion Credit Facility. Each of CyrusOne LP’s restricted
subsidiaries (other than any designated excluded subsidiary or receivables entity) that guarantees any other indebtedness of
CyrusOne LP or other indebtedness of the guarantors will be required to guarantee the senior notes in the future. Each such
guarantee is a senior unsecured obligation of the applicable guarantor, ranking equally with all existing and future unsecured senior
indebtedness of such guarantor and effectively subordinated to all existing and future secured indebtedness of such guarantor to
the extent of the value of the assets securing that indebtedness. The 2024 Notes and 2027 Notes are structurally subordinated to
all liabilities (including trade payables) of each subsidiary of CyrusOne LP that does not guarantee the 2024 Notes and 2027 Notes.
The 2024 Notes and 2027 Notes may be redeemed at our option prior to their scheduled maturity dates at the prices and premiums
and on the terms set forth in the respective indentures governing the notes.
On November 20, 2012, wholly-owned subsidiaries of the Company issued $525.0 million of 6.375% senior notes due 2022 (the
"6.375% Notes"). In March 2017, the Company repurchased all of the 6.375% Notes with an aggregate face value of $474.8
million, a net carrying value of $469.0 million, for total consideration of $515.1 million, including accrued and unpaid interest of
$10.3 million. In connection with the debt prepayment, we recognized a loss on early extinguishment of debt of $36.2 million.
Our debt agreements contain customary provisions with respect to events of default, affirmative and negative covenants and
borrowing conditions. The most restrictive covenants are generally included in the $3.0 Billion Credit Agreement. The $3.0 Billion
Credit Agreement requires us to maintain certain financial covenants including the following, in each case on a consolidated basis,
a minimum fixed charge ratio, maximum total and secured leverage ratios, a minimum tangible net worth requirement, a maximum
secured recourse indebtedness ratio, a minimum unencumbered debt yield ratio and a maximum ratio of unsecured indebtedness
to unencumbered asset value. In order to continue to have access to amounts available under the $3.0 Billion Credit Agreement,
the Company must remain in compliance with all of that agreement's covenants. As of December 31, 2018, we believe we are in
compliance with all provisions of our debt agreements.
As of December 31, 2018, all of our outstanding debt matures between 2023 and 2027.
93
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The following table summarizes aggregate maturities of the $3.0 Billion Credit Facility and 2024 Notes and 2027 Notes for the
five years subsequent to December 31, 2018, and thereafter:
IN MILLIONS
2019
2020
2021
2022
2023
Thereafter
Total debt
$3.0 Billion
Credit Facility
2024 Notes
and 2027
Notes
$
$
— $
—
—
—
1,143.0
300.0
1,443.0 $
— $
—
—
—
—
1,200.0
1,200.0 $
Total
—
—
—
—
1,143.0
1,500.0
2,643.0
13. Capital Lease Obligations and Lease Financing Arrangements
As of December 31, 2018 and 2017, capital lease obligations and lease financing arrangements are as follows (in millions):
Capital lease obligations
Lease financing arrangements
Total
December 31, 2018 December 31, 2017
$
$
33.4 $
123.3
156.7 $
10.1
131.9
142.0
Capital lease obligations—We use leasing as a source of financing for certain data center facilities and related equipment. We
currently operate five data center facilities subject to capital leases. The remaining terms of our capital leases range from 2021 to
2041. We have options to extend the initial lease term on all but one of these leases.
Lease financing arrangements—Lease financing arrangements represent leases of real estate in which we are the accounting
owner and were involved in the construction of structural improvements to develop or improve buildings into data centers. The
remaining terms of our lease financing arrangements range from 2020 to 2035.
The following table summarizes aggregate minimum principal payments of the capital lease obligations for the five years subsequent
to December 31, 2018, and thereafter (in millions):
2019
2020
2021
2022
2023
Thereafter
Total
Capital Leases
$
$
2.7
2.8
2.9
2.0
1.0
22.0
33.4
Interest expense on capital lease obligations and lease financing arrangements was $9.0 million, $9.0 million and $10.6 million
for the years ended December 31, 2018, 2017 and 2016 respectively.
94
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The following table summarizes aggregate maturities of total future value and present value of the minimum payments associated
with our lease financing arrangements for the five years subsequent to December 31, 2018, and thereafter:
IN MILLIONS
2019
2020
2021
2022
2023
Thereafter
Future Value of
Payments
Interest
Present Value of
Payments
$
15.0 $
27.6
11.4
11.6
10.0
89.1
7.3 $
6.6
5.7
5.4
4.1
12.3
41.4 $
7.7
21.0
5.7
6.2
5.9
76.8
123.3
Total lease financing arrangements
$
164.7 $
The payment of interest on capital leases over the next five years and thereafter will be $1.7 million, $1.5 million, $1.3 million,
$1.1 million, $0.9 million and $9.3 million, respectively.
14. Fair Value of Financial Instruments
Fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a
basis for considering assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant
assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified
within Levels 1 and 2 of the hierarchy) and the reporting entity’s own assumptions about market participant assumptions
(unobservable inputs classified within Level 3 of the hierarchy) has been established.
Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to
access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either
directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs
that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable
at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity’s
own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement
is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value
measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment
of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset
or liability.
The fair value of cash and cash equivalents, rent and other receivables, construction costs payable, dividends payable and accounts
payable and accrued expenses approximate their carrying value because of the short-term nature of these financial instruments.
The carrying value, exclusive of deferred financing costs, for the revolving credit facilities and the floating rate term loans
approximate estimated fair value as of December 31, 2018 and 2017, due to the floating rate nature of the interest rates and the
stability of our credit ratings.
The carrying value and fair value of other financial instruments are as follows (in millions):
IN MILLIONS
For the year ended December 31,
2024 Notes
2027 Notes
GDS Equity investment
2018
2017
Carrying Value
Fair Value
Carrying Value
Fair Value
$
705.5 $
684.1 $
706.8 $
509.1
185.5
488.0
185.5
510.5
175.6
728.0
527.5
175.6
The fair values of our 2024 Notes and 2027 Notes as of December 31, 2018 were based on the quoted market prices for these
notes, which is considered Level 1 of the fair value hierarchy. The fair value of the equity investment in 2018 was based on the
quoted market price for the stock which is considered Level 1 of the fair value hierarchy.
For the year ended December 31, 2017, we recognized impairment losses of $58.0 million included in Impairment losses in our
Consolidated Statement of Operations. We utilize estimates of the fair value of assets to determine impairment losses. These
estimates include Level 3 inputs including market rents, expected occupancy and estimates of additional capital expenditures,
and cashflows from each investment.
95
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
15. Dividends
We have declared cash dividends on common shares and distributions on operating partnership units for the years ended
December 31, 2018 and 2017 as presented in the table below:
Record date
Payment date
Cash dividend per share or operating
partnership unit
March 31, 2017
June 30, 2017
September 29, 2017
December 29, 2017
March 29, 2018
June 29, 2018
September 28, 2018
January 2, 2019
April 14, 2017
July 14, 2017
October 13, 2017
January 12, 2018
April 13, 2018
July 13, 2018
October 12, 2018
January 11, 2019
$0.42
$0.42
$0.42
$0.42
$0.46
$0.46
$0.46
$0.46
As of December 31, 2018 and 2017 we had a dividend payable of $51.0 million and $41.8 million, respectively. On February 20,
2019, we announced a regular cash dividend of $0.46 per common share payable to shareholders of record as of the close of
business on March 29, 2019. The dividend will be paid on April 12, 2019.
16. Customer Leases
Customer lease arrangements customarily contain provisions that allow for renewal or continuation on a month-to-month
arrangement, and certain leases contain early termination rights. At lease inception, early termination is generally not deemed
probable due to the significant economic penalty incurred by the lessee to exercise its termination right and to relocate their
equipment.
The future minimum lease payments to be received under non-cancellable operating leases, excluding month-to-month
arrangements and metered power reimbursements, for the next five years are shown below:
IN MILLIONS
2019
2020
2021
2022
2023
Thereafter
17. Employee Benefit Plans
$
647.6
553.7
453.0
365.5
284.4
835.9
Currently, our employees participate in health care plans sponsored by CyrusOne, which provide medical, dental, vision and
prescription benefits. We incurred $3.3 million, $2.7 million and $4.4 million of expenses related to these plans for the years ended
December 31, 2018, 2017 and 2016, respectively.
CyrusOne offers a defined contribution 401(k) retirement savings plan to its employees. CyrusOne's matching contribution to its
retirement savings plan was $1.8 million, $1.5 million and $1.5 million for the years ended December 31, 2018, 2017 and 2016,
respectively.
18. Income (Loss) per Share
Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the
period. In addition, net income (loss) applicable to participating securities and the participating securities are both excluded from
the computation of basic income (loss) per share.
96
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Diluted income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during
the period, including restricted stock outstanding. If there is net income during the period, the dilutive impact of common stock
equivalents outstanding would also be reflected.
On September 28, 2018, CyrusOne Inc. completed a public offering of 6.7 million shares of its common stock for $397.3 million,
net of underwriting discounts and expenses of approximately $18.1 million. In connection with this offering, on September 25,
2018, CyrusOne Inc. entered into a forward sale agreement with Morgan Stanley & Co. LLC with respect to an additional 2.5
million shares of its common stock. On December 28, 2018, the Company effected a full physical settlement of the previously
announced forward sale agreement entered into with Morgan Stanley & Co. LLC. Upon settlement, the Company issued all such
shares to Morgan Stanley & Co. LLC in its capacity as forward purchaser, in exchange for net proceeds of approximately $148.2
million, in accordance with the provisions of the forward sales agreement. This agreement and the settlement thereof had no effect
on our diluted share count at December 31, 2018.
On August 15, 2016, CyrusOne Inc. completed a public offering of 3.4 million shares of its common stock for $164.8 million, net
of underwriting discounts of approximately $6.9 million. In connection with this offering, on August 10, 2016, CyrusOne Inc.
entered into (a) a forward sale agreement with Goldman, Sachs & Co. with respect to 3.4 million shares of its common stock, and
(b) an additional forward sale agreement with Goldman, Sachs & Co. with respect to approximately 1.0 million shares of its
common stock in connection with the underwriters' exercise of their option to purchase these shares. These agreements and the
settlement thereof had no effect on our diluted share count at December 31, 2016.
The following table reflects the computation of basic and diluted net (loss) income per share:
IN MILLIONS, except per share amounts
For December 31,
Numerator:
Net income (loss)
Less: Restricted stock dividends
Net income (loss) available to stockholders
Denominator:
Year Ended
Year Ended
Year Ended
2018
2017
2016
Basic
Diluted
Basic
Diluted
Basic
Diluted
$
$
1.2 $
(1.1)
0.1 $
1.2 $ (83.5) $ (83.5) $ 19.9 $ 19.9
(1.1)
(0.7)
(0.9)
0.1 $ (84.4) $ (84.4) $ 19.2 $ 19.2
(0.7)
(0.9)
Weighted average common outstanding-basic
99.8
Performance-based restricted stock and units(1)
Weighted average shares outstanding-diluted
EPS:
Net income (loss) per share-basic
Effect of dilutive shares:
88.9
99.8
0.6
100.4
88.9
—
88.9
78.3
78.3
0.7
79.0
$ —
$ (0.95)
$ 0.24
Net income (loss) per share-diluted
$ —
$ (0.95)
$ 0.24
(1) We have excluded 0.4 million weighted average shares of restricted stock, and 0.1 million of weighted average stock options which are securities convertible
into common stock from our diluted earnings per share as of December 31, 2017. These amounts were deemed anti-dilutive.
19. Stockholders' Equity
Capitalization
During the year ended December 31, 2018 and 2017, we sold 12.2 million and 12.8 million shares of common stock, respectively,
at an average price of $59.28 and $56.10, respectively. At December 31, 2018, the Company had approximately 108.3 million
shares of common stock outstanding.
97
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Stock Plans
Stock-based compensation expense was as follows:
For the periods ended December 31,
Founders
2013 Grants
2014 Grants
2015 Grants
2016 Grants
2017 Grants
2018 Grants
Total
2018
2017
2016
$
$
— $
—
—
0.4
5.7
4.6
6.8
17.5 $
— $
—
0.1
1.8
6.6
6.2
—
14.7 $
0.3
0.1
1.2
3.5
7.2
—
—
12.3
The board of directors of CyrusOne Inc. adopted the 2012 Long-Term Incentive Plan ("LTIP"), prior to the IPO, which was amended
and restated on May 2, 2016. The LTIP is administered by the compensation committee of the board of directors. Awards issuable
under the LTIP include common stock, restricted stock, restricted stock units, stock options and other incentive awards. CyrusOne
Inc. has reserved a total of 8.9 million shares of CyrusOne Inc. common stock for issuance pursuant to the LTIP, which may be
adjusted for changes in capitalization and certain corporate transactions. To the extent that an award, if forfeitable, expires,
terminates or lapses, or an award is otherwise settled in cash without the delivery of shares of common stock to the participant,
then any unpaid shares subject to the award will be available for future grant or issuance under the LTIP. The payment of dividend
equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under
the LTIP. The related stock compensation expense incurred by CyrusOne Inc. is allocated to the operating partnership. Shares
available under the LTIP at December 31, 2018, were approximately 5.1 million. Shares vest according to each agreement and as
long as the employee remains employed with the Company. The Company has granted awards with time-based vesting,
performance-based vesting and market-based vesting features. The performance-based vesting metrics granted have varied and
are described in each of the grant years below.
The market-based metric is total stockholder return (TSR) compared to the MSCI US REIT Index (REIT Index) as defined in the
award agreements. The market-based restricted stock/units vest annually based upon the achievement of certain criteria for each
of the three-year measurement periods. In each of the first two years vesting is limited to 100% of the target. If at the end of the
third year total performance over the three-year period exceeds the REIT Index by 2% or more, up to 200% of these awards may
vest. The market-based awards will vest based on the below scales. The scales are linear between each point and awards are
interpolated between the points.
- If CyrusOne's TSR is less than the return of the REIT Index equals 0%
- If CyrusOne's TSR is equal to or greater than the return of the REIT Index equals 100%; up to 200% if CyrusOne's TSR exceeds
the return of the REIT Index by 2%
- If CyrusOne's TSR exceeds the return of the REIT Index, but is negative, any calculated vesting amount will be reduced by 50%
The Company uses the Black-Scholes option-pricing model for time and performance-based options and a Monte Carlo simulation
for market-based awards. The fair values of these awards use assumptions such as volatility, risk-free interest rate, and expected
term of the awards.
The holders of restricted stock have all the rights and privileges of shareholders including the right to vote. The holders of restricted
stock units do not have all of the rights and privileges of shareholders and do not have the right to vote. These rights will be
acquired upon the settlement of the restricted stock units and the issuance of shares. The time-based restricted stock units have
the right to receive dividends that are payable within ten days following the date the dividends are payable to shareholders. Market-
based restricted stock units accrue dividends which are paid upon the vesting and settlement of the units.
Compensation expense is measured based on the estimated grant-date fair value. Expense for time-based grants is recognized
under a straight-line method. For market-based grants, expense is recognized under a graded expense attribution method. For
performance-based grants, expense is recognized under a graded expense attribution method if it is probable that the performance
targets will be achieved. Any dividends declared with respect to the performance and market-based shares shall be accrued by the
Company and distributed on the vesting date provided that the applicable performance goal has been attained.
98
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The compensation expense for the year ended December 31, 2016 includes $0.8 million due to the acceleration of equity awards
of a senior executive who left the Company. The compensation expense for the year ended December 31, 2015 includes $2.4
million due to the acceleration of equity awards of two senior executives who left the Company.
Founders Grants
On January 24, 2013, the Company granted one million shares of time-based restricted stock, which had an aggregate value of
$19.0 million on the grant date and vested on January 24, 2016.
2013 Grants
On April 17, 2013, the Company issued performance and market-based awards in the form of stock options and restricted stock.
For these awards, vesting was tied 50% to the achievement of a non-GAAP financial measure related to the Company's performance
(cumulative EBITDA targets, as defined in the agreement) using the scale, described below under 2014 Grants, over the 2013-2015
performance period, and 50% to a market-based performance measure. The portion of the awards tied to cumulative EBITDA
vested annually over a three-year period based on the Company attaining predetermined cumulative EBITDA targets. The stock
option awards have a contractual life of 10 years from the award date and were granted with an exercise price equal to $23.58.
Total awards granted in 2013 had a grant date fair value of $25.4 million. As of December 31, 2018, there was no unearned
compensation related to the awards granted in 2013 as all such awards are fully vested.
2014 Grants
On February 7, 2014, the Company issued performance and market-based awards under the LTIP in the form of restricted stock.
For these awards, vesting was tied 50% to the achievement of a non-GAAP financial measure related to the Company's performance
(cumulative Adjusted EBITDA targets, as defined in the agreement) over the 2014-2016 performance period, and 50% to a market-
based performance measure. The portion of the awards tied to cumulative Adjusted EBITDA vested annually over a three-year
period based on the Company attaining predetermined cumulative Adjusted EBITDA targets and as long as the employee remained
employed with the Company.
The cumulative EBITDA targets are based on the below scales. The scales are linear between each point and awards are interpolated
between the points.
- Below 90% of performance target equals 0%
- At 90% of performance target equals 50%
- At 100% of performance target equals 100%
- At or above 115% of performance target equals up to 200%
In addition, during the year ended December 31, 2014, the Company also granted from time-to-time a total of 46,313 additional
time-based restricted shares which had an aggregate value of $1.0 million on the grant date. These shares cliff vested either one
year after the grant date or three years after the grant date.
Total awards granted in 2014 had a grant date fair value of $12.9 million. As of December 31, 2018, there was no unearned
compensation related to the awards granted in 2014 as all such awards are fully vested.
2015 Grants
On February 10, 2015, the Company issued awards under the LTIP in the form of options and restricted stock. The stock options
are time-based and vest annually on a pro-rata basis over three years. Twenty percent of the restricted stock awards are subject to
time-based vesting and eighty percent of the restricted stock awards are equally split between performance-based and market-
based vesting. The performance-based metric is return on assets, which is a non-GAAP financial measure that is defined in the
award agreement. The time-based restricted stock will vest pro-rata annually over three years. The performance and market-based
restricted stock will vest annually based upon the achievement of certain criteria for each year of the three-year measurement
periods. The first two years are capped at 100% of the target with a cumulative true-up to a maximum of 200% possible in year
three.
The performance-based awards will vest based on the same scales as the awards granted during 2014.
In addition, during the year ended December 31, 2015, the Company also granted from time to time a total of 50,300 shares of
time-based restricted stock and 67,012 shares of performance-based restricted stock for various new employee hires with vesting
schedules ranging from annual to cliff vesting in three years.
99
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Total awards granted in 2015 had a grant date fair value of $13.8 million. As of December 31, 2018, there was no unearned
compensation related to the awards granted in 2015 as all such awards are fully vested.
2016 Grants
On February 1, 2016, the Company issued 641,097 shares of time, performance and market-based awards under the LTIP in the
form of restricted stock. The grant date fair value of time and performance-based restricted shares was $36.99. The grant date fair
value of market-based restricted shares was $43.66. The Company issued stock options on February 1, 2016. The stock option
awards have a contractual life of 10 years from the award date and were granted with an exercise price equal to $36.99. The
Company issued 222,461 options with a grant date fair value of $6.99.
The performance-based metric is return on assets, which is a non-GAAP financial measure and is defined in the award agreement.
The time-based restricted stock awards generally vest pro-rata annually over a three-year period. The performance and market-
based restricted stock awards vest annually based upon the achievement of certain criteria for each of the three-year measurement
periods. The first two years are capped at 100% of the target with a cumulative true-up to a maximum of 200% possible in year
three. Certain employees were also awarded time-based restricted stock that cliff vest at the end of three years. The stock options
are time-based and vest annually on a pro-rata basis over three years.
The performance-based awards will vest based on the same scales as the awards granted during 2014.
In addition, during the year ended December 31, 2016, for various new employee hires, the following grants were made:
•
•
5,894 shares of time-based restricted stock which cliff vest in three years from the date of each grant.
47,667 shares of time-based restricted stock which vest annually on a pro rata basis over a three-year period from the
date of each grant.
Total awards granted in 2016 had a grant date fair value of $22.6 million. As of December 31, 2018, unearned compensation
representing the unvested portion of the awards granted in 2016 totaled $1.0 million, with a weighted average vesting period of
0.1 years.
2017 Grants
On February 13, 2017, the Company issued time and market-based awards under the LTIP in the form of restricted stock units
and restricted stock. The Company granted 119,218 time-based restricted stock units that generally vest annually on a pro-rata
basis over a three-year period and 18,179 shares of time-based restricted stock that generally vest over a one-year period with a
grant date fair value of $48.13, and 129,146 market-based restricted stock units, at target, with a grant date fair value of $63.23.
In addition, during the year ended December 31, 2017 the Company granted from time to time a total of 20,852 time-based restricted
stock units that vest annually on a pro rata basis over a three-year period.
Total awards granted in 2017 had a grant date fair value of $15.9 million. As of December 31, 2018, unearned compensation
representing the unvested portion of the awards granted in 2017 totaled $4.3 million, with a weighted average vesting period of
0.9 years.
2018 Grants
On February 26, 2018, the Company issued time and market-based awards under the LTIP in the form of restricted stock units
and restricted stock. The Company granted 161,797 time-based restricted stock units that generally vest annually on a pro-rata
basis over a three-year period and 17,052 shares of time-based restricted stock that generally vest over a one-year period with a
grant date fair value of $51.31, and 160,266 market-based restricted stock units, at target, with a grant date fair value of $52.53.
In addition, during the year ended December 31, 2018 the Company granted from time to time a total of 40,249 time-based restricted
stock units that vest annually on a pro rata basis over a three-year period.
Total awards granted in 2018 had a grant date fair value of $20.2 million. As of December 31, 2018, unearned compensation
representing the unvested portion of the awards granted in 2018 totaled $12.5 million, with a weighted average vesting period of
1.7 years.
100
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Restricted Stock Units, Restricted Stock and Stock Option Activity
The following tables summarize the unvested restricted stock units, restricted stock and stock options activity and the weighted
average fair value of these shares at the date of grant for the year ended December 31, 2018:
Restricted Stock Units ("RSU")
For the year ended December 31,
Non-vested at January 1
Granted
Vested
Forfeited
Non-vested at December 31
There were no non-vested restricted stock units at December 31, 2016.
Restricted Stock ("RS")
For the year ended December 31,
Non-vested at January 1
Granted
Vested
Forfeited
Non-vested at December 31
The non-vested restricted stock at December 31, 2016 were 1,274,713.
Stock Options
For the year ended December 31,
Outstanding at January 1
Granted
Exercised
Forfeited or expired
Outstanding at December 31
Exercisable at December 31
Vested and expected to vest
2018
Weighted
Average
Grant Date
Fair Value
Restricted
Stock Units
265,002 $
362,312
(88,425)
(27,480)
511,409 $
56.08
53.23
44.52
52.97
56.23
2018
Weighted
Average
Grant Date
Fair Value
Restricted
Stock
715,098 $
17,052
(253,015)
(59,779)
419,356 $
32.21
51.31
28.25
29.69
35.73
2018
Weighted
Average
Exercise
Price
Options
415,459 $
—
(14,236)
—
401,223
339,588
401,223 $
31.67
—
23.58
—
31.96
31.04
31.96
The outstanding options at December 31, 2016 were 434,268.
The aggregate intrinsic value of options outstanding and options exercisable is based on the Company's closing stock price on the
last trading day of the fiscal year for in-the-money options. The aggregate intrinsic value represents the cumulative difference
between the fair market value of the underlying common stock and the option exercise prices. The total intrinsic value of options
exercised during 2018 was $0.6 million, 2017 was $0.5 million and 2016 was $1.3 million.
101
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The aggregate intrinsic value of options outstanding at December 31, 2018 was $8.7 million. The aggregate intrinsic value of
options exercisable at December 31, 2018 was $7.7 million.
Stock Option Assumptions
The following table summarizes the stock option assumptions for the years ended December 31, 2018, 2017 and 2016:
Options Outstanding
Weighted
Average
Remaining
Contractual
Terms
(Years)
Number
of
Shares
Options Exercisable
Weighted
Average
Remaining
Contractual
Terms
(Years)
Number
of
Shares
67,601
143,358
12,719
210,590
67,322
143,358
12,719
192,060
53,086
143,358
12,719
192,060
6.3
8.1
8.6
9.1
5.3
7.1
7.6
8.1
4.3
6.1
6.6
6.8
67,601
47,786
4,240
18,530
67,322
95,572
8,479
64,022
53,086
143,358
12,719
130,425
6.3
8.1
8.6
9.1
5.3
7.1
7.6
8.1
4.3
6.1
6.6
6.7
Assumption Range
Expected
Annual
Dividend
Yield
Expected
Terms
in Years
3.4%
4.4%
4.4%
4.1%
3.4%
4.4%
4.4%
4.1%
3.4%
4.4%
4.4%
4.1%
6.0
5.5-6.5
5.5-6.5
5.5-6.5
6.0
5.5-6.5
5.5-6.5
5.5-6.5
6.0
5.5-6.5
5.5-6.5
5.5-6.5
Risk-Free
Interest Rate
0.92%
1.6% - 1.75%
1.6% - 1.75%
1.47% - 1.64%
0.92%
1.6% - 1.75%
1.6% - 1.75%
1.47% - 1.64%
0.92%
1.6% - 1.75%
1.6% - 1.75%
1.47% - 1.64%
Expected
Volatility
35%
32.5% - 37.5%
32.5% - 37.5%
27.5% - 35.0%
35%
32.5% - 37.5%
32.5% - 37.5%
27.5% - 35.0%
35%
32.5% - 37.5%
32.5% - 37.5%
27.5% - 35.0%
Exercise Prices
2016
2017
2018
$23.58
$28.42
$30.74
$36.99
$23.58
$28.42
$30.74
$36.99
$23.58
$28.42
$30.74
$36.99
20. Related Party Transactions
The Company has a strategic partnership with GDS, a developer and operator of high-performance, large-scale data centers in
China. In connection with our investment in GDS, the Company entered into an agreement with GDS for the joint marketing of
each company’s data centers. Also as a part of the agreement, the Company's Chief Executive Officer joined the board of directors
of GDS on June 22, 2018.
For the year ended December 31, 2018, the Company incurred $0.9 million of commission and referral charges and accrued
expenses payable to GDS. The commission and referral charges were capitalized as deferred leasing costs and will be amortized
over the terms of the respective customer leases. No significant referral expense was recognized by the Company in 2018 or 2017.
We have not recognized any referral revenue related to the agreement with GDS in 2018 or 2017. See Note 9, "Equity Investments",
for additional information related to our GDS investment.
The Company has a 10% equity interest in ODATA, a Brazilian headquartered company that specializes in providing colocation
services to wholesale customers, such as hyperscale cloud providers, financial services and telecommunications companies, and
also to enterprises across multiple industries. In connection with these investments, CyrusOne and ODATA entered a commercial
agreement covering leasing activity with CyrusOne customers in the ODATA portfolio. Also as a part of the agreement, the
Company's Chief Technology Officer joined the ODATA board of directors in October 2018.
21. Income Taxes
CyrusOne Inc. elected to be taxed as a REIT under the Code, commencing with our taxable year ended December 31, 2013. To
remain qualified as a REIT, we are required to distribute at least 90% of our taxable income to our stockholders and meet various
other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity
of stock ownership. Provided we continue to qualify for taxation as a REIT, we are generally not subject to corporate level federal
income tax on the earnings distributed currently to our stockholders. It is our policy and intent, subject to change, to distribute
102
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
100% of our taxable income and therefore no provision is required in the accompanying financial statements for federal income
taxes with regards to activities of CyrusOne Inc. and its subsidiary pass-through entities.
The REIT and certain of its subsidiaries are subject to state and local income taxes, franchise taxes, and gross receipts taxes. We
have elected to treat certain of our subsidiaries as taxable REIT subsidiaries (TRSs). Our TRSs are subject to U.S. federal, state
and local corporate income taxes. Our foreign subsidiaries are subject to corporate income taxes in the jurisdictions in which they
operate.
Income tax expense (benefit) for the years ended December 31, 2018 and 2017 as reported in the accompanying Consolidated
Statement of Operations was comprised of the following:
IN MILLIONS
Current
Federal
State
Total current expense
$
Deferred:
Federal
State
Foreign
Total deferred (benefit) expense
Total income tax expense
Year Ended December 31,
2017
2018
2016
1.0 $
2.0
3.0
—
—
(2.4)
(2.4)
0.6
1.2 $
1.8
3.0
—
—
—
—
3.0
An income tax expense reconciliation between the U.S. statutory tax rate and the effective tax rate is as follows:
IN MILLIONS
Year Ended December 31,
2017
2018
2016
Income tax at U.S. federal statutory income tax rate
State and local taxes, net of federal income tax benefit
Impact of REIT status
Permanent differences
Foreign tax rate differential
Other
Valuation allowance
Income tax (benefit) expense
$
$
0.4 $
2.0
(2.1)
(0.1)
0.2
0.1
0.1
0.6 $
(28.2) $
1.8
28.6
—
—
—
0.8
3.0 $
0.6
1.2
1.8
—
—
—
—
1.8
7.6
1.2
(7.2)
—
0.2
1.8
The effective tax rate on income from continuing operations differs from tax at the statutory rate primarily due to our status as a
REIT and taxation of our foreign subsidiaries.
Deferred tax assets and liabilities are recognized for the estimated future tax consequences attributable to differences between
the financial statement carrying amounts of existing assets and liabilities and their respective tax bases.
103
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
The components of the Company’s deferred tax assets and liabilities are as follows:
IN MILLIONS
Deferred tax assets
Net operating loss carryforwards
Accounts receivable/payable and other
Capital leases
Total gross deferred tax assets
Valuation allowance
Total gross deferred tax assets, net
Deferred tax liabilities
Fixed assets
Intangibles
Total gross deferred tax liabilities
Total net deferred tax assets/(liabilities)
Year Ended December 31,
2018
2017
$
$
$
$
$
$
15.1 $
7.4
1.8
24.3 $
(6.9)
17.4 $
(73.5)
(12.8)
(86.3)
(68.9)
7.2
—
—
7.2
(7.2)
—
—
—
—
—
On August 24, 2018, the Company completed the acquisition of Zenium. The Company recorded a deferred tax liability of $72.7
million in connection with the acquisition, which primarily related to differences between the carrying amounts of the assets and
liabilities acquired and their tax bases in the jurisdictions in which they operate.
As of December 31, 2018, the Company’s deferred tax assets were primarily attributable to U.S. state and local and foreign NOL
carryforwards. A valuation allowance will be recorded to reduce deferred tax assets to amounts that are more likely than not to be
realized. As of each reporting date, the Company’s management considers new evidence, both positive and negative, that could
impact management’s view with regard to future realization of deferred tax assets. The Company has recorded a valuation allowance
of $6.9 million as of December 31, 2018.
The Company and its subsidiaries file tax returns in the U.S. federal jurisdiction, various state and local jurisdictions, and certain
foreign jurisdictions. With few exceptions, the Company is no longer subject to examination of its U.S. federal, state and local
tax returns for years prior to 2015.
As of December 31, 2018, the Company as no liability for unrecognized tax benefits. If applicable, the Company will recognize
interest and penalties related to unrecognized tax benefits as a component of tax expense.
22. Commitments and Contingencies
Operating Leases
We lease certain data center facilities and equipment from third parties. Operating lease expense was $6.6 million, $8.2 million
and $7.5 million for the years ended December 31, 2018, 2017 and 2016, respectively. Certain of these leases provide for renewal
options with fixed rent escalations beyond the initial lease term.
At December 31, 2018, future minimum lease payments required under operating leases having initial or remaining non-cancellable
lease terms in excess of one year are as follows:
IN MILLIONS
2019
2020
2021
2022
2023
Thereafter
Total
Total
5.0
4.9
3.7
3.7
3.5
43.4
64.2
$
$
104
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Capital Leases
We use capital leases as a source of financing. See Note 13, Capital Lease Obligations and Lease Financing Arrangements, for
future minimum principal payments.
Standby Letters of Credit
As of December 31, 2018, CyrusOne Inc. had outstanding letters of credit of $8.0 million as security for obligations under the
terms of our lessee agreements.
Performance Guarantees
Customer contracts generally require specified levels of performance related to uninterrupted service and cooling temperatures.
If these performance standards are not met, we could be obligated to issue billing credits to the customer. Management assesses
the probability that a performance standard will not be achieved. As of December 31, 2018 and 2017, no accruals for performance
guarantees were required.
Indemnifications
During the normal course of business, we make certain indemnities, commitments and guarantees under which we may be required
to make payments in relation to certain transactions. These include (i) intellectual property indemnities to customers in connection
with the use, sale and/or license of products and services, (ii) indemnities to vendors and service providers pertaining to claims
based on our negligence or willful misconduct and (iii) indemnities involving the representations and warranties in certain contracts.
In addition, we have made contractual commitments to several employees providing for payments upon the occurrence of certain
prescribed events. The majority of these indemnities, commitments and guarantees do not provide for any limitation on the
maximum potential for future payments that we could be obligated to make.
Purchase Commitments
We have entered into non-cancellable contracted commitments for construction of data center facilities and acquisition of
equipment. As of December 31, 2018, these commitments were approximately $281.9 million and are expected to be incurred
over the next one to two years. In addition, we have entered into equipment and utility power contracts, which require minimum
purchase commitments for power. These agreements range from one to two years and provide for payments for early termination
or require minimum payments for the remaining term. As of December 31, 2018, the minimum commitments for these arrangements
were approximately $45.4 million.
Contingencies
CyrusOne is involved in legal, tax and regulatory proceedings arising from the conduct of its business activities. Liabilities are
established for loss contingencies when losses associated with such claims are deemed to be probable, and the loss can be reasonably
estimated. Based on information currently available and consultation with legal counsel, we believe that the outcome of all claims
will not, individually or in the aggregate, have a material effect on our financial statements.
23. Guarantors
The 2024 Notes and 2027 Notes issued by CyrusOne LP (the “LP Co-Issuer”) and CyrusOne Finance Corp. (the “Finance Co-
Issuer” and, together with the LP Co-Issuer, the “Co-Issuers”) are fully and unconditionally and jointly and severally guaranteed
on a senior unsecured basis. The guarantors include CyrusOne Inc. (the “Parent Guarantor”), the General Partner and certain
domestic wholly-owned subsidiaries of the Operating Partnership (together with the General Partner, the “Guarantor Subsidiaries”;
the Guarantor Subsidiaries together with the Parent Guarantor, the “Guarantors”). As of December 31, 2018 and 2017, non-
guarantors are all of our foreign subsidiaries and certain domestic subsidiaries (collectively, the “Non-Guarantors”). The foreign
subsidiaries we acquired upon our acquisition of Zenium are classified as Non-Guarantors.
The indentures governing the 2024 Notes and 2027 Notes contain affirmative and negative covenants customarily found in
indebtedness of this type, including covenants that restrict, subject to certain exceptions, the Company’s ability to: incur secured
or unsecured indebtedness; pay dividends or distributions on its equity interests, or redeem or repurchase equity interests of the
Company; make certain investments or other restricted payments; enter into transactions with affiliates; enter into agreements
limiting the ability of the Operating Partnership’s subsidiaries to pay dividends or make certain transfers and other payments to
the Operating Partnership or to other subsidiaries; sell assets; and merge, consolidate or transfer all or substantially all of the
operating partnership’s assets. The Company and its subsidiaries are also required to maintain total unencumbered assets of at
least 150% of their unsecured debt on a consolidated basis, subject to certain qualifications set forth in the indenture.
105
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Notwithstanding the foregoing, the covenants contained in the indentures do not restrict the Company’s ability to pay dividends
or distributions to stockholders to the extent (i) no default or event of default exists or is continuing under the indentures and (ii)
the Company believes in good faith that we qualify as a REIT under the Code and the payment of such dividend or distribution
is necessary either to maintain its status as a REIT or to enable it to avoid payment of any tax that could be avoided by reason of
such dividend or distribution. Subject to the provisions of the indentures governing the 2024 Notes and 2027 Notes, in certain
circumstances, a Guarantor may be released from its guarantee obligation, including:
•
•
•
•
•
•
•
upon the sale or other disposition (including by way of consolidation or merger) of such Guarantor or of all of the capital
stock of such Guarantor such that such Guarantor is no longer a restricted subsidiary under the indentures,
upon the sale or disposition of all or substantially all of the assets of the Guarantor,
upon the LP Co-issuer designating such Guarantor as an unrestricted subsidiary under the terms of the indentures,
if such Guarantor is no longer a guarantor or other obligor of any other indebtedness of the LP Co-issuer or the Parent
Guarantor,
upon the LP Co-issuer designating such Guarantor as an excluded subsidiary under the terms of the indentures,
upon the defeasance or discharge of the 2024 Notes or 2027 Notes, as applicable, in accordance with the terms of the
indentures, and
upon the 2024 Notes or 2027 Notes, as applicable, being rated investment grade by at least two rating agencies and no
default or event of default shall have occurred and be continuing.
The Parent Guarantor is a REIT whose only material asset is its ownership of operating partnership units of the LP Co-Issuer. The
LP Co-Issuer and its subsidiaries hold substantially all the assets of the Company. The LP Co-Issuer conducts the operations of
the business, along with its subsidiaries. The Finance Co-Issuer does not have any operations or revenues. The Guarantor
Subsidiaries include substantially all of our domestic operations and include approximately 85% of our gross operating real estate.
The Non-Guarantors include substantially all of our foreign operations, primarily in the United Kingdom, Germany and Singapore.
The Non-Guarantors' assets also include the ownership of our equity investment in GDS of $185.5 million and $175.6 million as
of December 31, 2018, and 2017, respectively.
The following schedules present the consolidating balance sheets as of December 31, 2018 and 2017, and the consolidating
statements of operations, comprehensive income (loss) and cash flows for the years ended December 31, 2018, 2017 and 2016
for the Parent Guarantor, General Partner, each Co-issuer, Guarantor Subsidiaries, and Non-Guarantors. Eliminations and
consolidation adjustments primarily relate to the elimination of investments in subsidiaries and equity earnings (loss) related to
investments in subsidiaries (in millions).
106
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Consolidating Balance Sheets
IN MILLIONS
As of December 31, 2018
Total investment in real estate, net
Cash and cash equivalents
Investment in subsidiaries
Rent and other receivables, net
Intercompany receivable
Equity investment
Goodwill
Intangible assets, net
Other assets
Total assets
Debt, net
Intercompany payable
Capital lease obligations and lease financing
arrangements
Accounts payable and accrued expenses
Construction costs payable
Dividends payable
Deferred revenue and prepaid rents
Deferred tax liability
Total liabilities
Total stockholders' equity
Total liabilities and equity
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
—
—
—
—
—
—
2,216.9
22.2
3,122.5
—
23.2
—
—
—
—
—
—
— 1,761.5
—
—
—
—
—
—
—
0.5
—
—
—
—
—
—
—
—
—
3,611.2
644.9
36.9
4,293.0
27.2
—
93.3
6.8
—
455.1
178.1
219.8
37.2
—
—
(5,361.6)
64.4
—
12.9
—
106.2
—
(1,791.5)
198.1
—
57.6
19.7
—
—
—
—
—
198.1
455.1
235.7
240.0
$ 2,240.1 $
22.2 $ 4,884.5 $
— $ 4,591.5 $
970.4 $
(7,116.2) $ 5,592.5
$
— $
— $ 2,624.7
— $
— $
— $
— $ 2,624.7
—
—
—
—
51.0
—
—
51.0
—
—
—
—
—
—
—
23.2
—
19.7
—
—
—
—
— 2,667.6
2,189.1
22.2
2,216.9
—
—
—
—
—
—
—
—
—
1,761.5
6.8
(1,791.5)
—
104.0
95.9
175.6
—
144.9
—
2,281.9
2,309.6
52.7
5.7
19.7
—
3.7
68.9
157.5
812.9
—
—
—
—
—
—
156.7
121.3
195.3
51.0
148.6
68.9
(1,791.5)
3,366.5
(5,324.7)
2,226.0
$ 2,240.1 $
22.2 $ 4,884.5 $
— $ 4,591.5 $
970.4 $
(7,116.2) $ 5,592.5
107
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
IN MILLIONS
As of December 31, 2017
Total investment in real estate, net
Cash and cash equivalents
Investment in subsidiaries
Rent and other receivables, net
Intercompany receivable
Equity investment
Goodwill
Intangible assets, net
Other assets
Total assets
Debt, net
Intercompany payable
Capital lease obligations and lease financing
arrangements
Accounts payable and accrued expenses
Construction costs payable
Dividends payable
Deferred revenue and prepaid rents
Total liabilities
Total stockholders' equity
Total liabilities and equity
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
—
—
—
—
—
—
1,718.0
17.2
2,190.2
—
20.0
—
—
—
—
—
—
— 1,656.4
—
—
—
—
—
—
—
0.5
—
—
—
—
—
—
—
—
—
3,014.9
25.8
17.7
3,058.4
151.2
—
84.6
—
—
455.1
203.0
177.7
0.7
—
2.6
—
175.6
—
—
2.7
—
151.9
(3,925.4)
—
(1,676.4)
—
—
—
—
—
87.2
—
175.6
455.1
203.0
180.9
$ 1,738.0 $
17.2 $ 3,847.1 $
— $ 4,086.5 $
207.4 $
(5,584.1) $ 4,312.1
$
— $
— $ 2,089.4
— $
— $
— $
— $ 2,089.4
—
—
—
—
41.8
—
41.8
—
—
—
—
—
—
20.0
—
19.7
—
—
—
— 2,129.1
1,696.2
17.2
1,718.0
—
—
—
—
—
—
—
—
1,656.4
—
(1,676.4)
—
110.0
77.3
115.5
—
110.8
32.0
0.9
—
—
0.8
—
—
—
—
—
142.0
97.9
115.5
41.8
111.6
2,070.0
33.7
(1,676.4)
2,598.2
2,016.5
173.7
(3,907.7)
1,713.9
$ 1,738.0 $
17.2 $ 3,847.1 $
— $ 4,086.5 $
207.4 $
(5,584.1) $ 4,312.1
108
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Consolidating Statements of Operations and Comprehensive Income (Loss)
IN MILLIONS
Year Ended December 31, 2018
Revenue
Total operating expenses
Operating income
Interest expense
Unrealized gain on marketable equity investment
Loss on early extinguishment of debt
(Loss) income before income taxes
Income tax (expense) benefit
Equity (loss) earnings related to investment in subsidiaries
Net (loss) income
Other comprehensive loss
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(28.9)
(28.9)
—
(0.3)
(0.3)
—
—
—
—
(110.6)
—
(3.1)
(113.7)
—
84.8
(28.9)
—
—
—
—
—
—
—
—
—
—
—
—
799.7
700.2
99.5
—
—
—
99.5
(3.0)
—
96.5
—
21.7
31.5
(9.8)
(3.3)
9.9
—
(3.2)
2.4
—
(0.8)
(10.9)
—
—
—
821.4
731.7
89.7
19.2
(94.7)
—
—
19.2
—
(55.6)
(36.4)
9.9
(3.1)
1.8
(0.6)
—
1.2
—
(10.9)
Comprehensive (loss) income
$
(28.9) $
(0.3) $
(28.9) $
— $
96.5 $
(11.7) $
(36.4) $
(9.7)
IN MILLIONS
Year Ended December 31, 2017
Revenue
Total operating expenses
Operating income (loss)
Interest expense
Loss on early extinguishment of debt
(Loss) income before income taxes
Income tax expense
Equity (loss) earnings related to investment in subsidiaries
Net (loss) income
Other comprehensive income
Comprehensive (loss) income
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
—
—
—
—
—
—
—
(18.7)
(18.7)
—
—
—
—
—
—
—
—
(0.2)
(0.2)
—
—
—
—
(76.2)
(36.5)
(112.7)
—
94.0
(18.7)
—
—
—
—
—
—
—
—
—
—
—
666.4
640.4
26.0
—
—
26.0
(3.0)
(4.6)
18.4
—
5.6
7.5
(1.9)
(2.6)
—
(4.5)
—
—
(4.5)
75.5
—
—
—
10.7
—
10.7
—
(70.5)
(59.8)
—
$
(18.7) $
(0.2) $
(18.7) $
— $
18.4 $
71.0 $
(59.8) $
672.0
647.9
24.1
(68.1)
(36.5)
(80.5)
(3.0)
—
(83.5)
75.5
(8.0)
IN MILLIONS
Year Ended December 31, 2016
Revenue
Total operating expenses
Operating income
Interest expense
(Loss) income before income taxes
Income tax expense
Equity earnings (loss) related to investment in subsidiaries
Net income (loss)
Other comprehensive loss
Parent
Guarantor(1
)
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
—
—
—
—
—
—
15.9
15.9
—
—
—
—
—
—
—
0.2
0.2
—
—
—
—
(49.1)
(49.1)
—
65.0
15.9
—
—
—
—
—
—
—
—
—
—
523.7
457.5
66.2
—
66.2
(1.8)
0.6
65.0
—
5.4
1.1
4.3
(2.8)
1.5
—
—
1.5
(0.9)
—
—
—
3.1
3.1
—
(81.7)
(78.6)
—
529.1
458.6
70.5
(48.8)
21.7
(1.8)
—
19.9
(0.9)
Comprehensive income (loss)
$
15.9 $
0.2 $
15.9 $
— $
65.0 $
0.6 $
(78.6) $
19.0
109
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
Consolidating Statements of Cash Flows
IN MILLIONS
Year Ended December 31, 2018
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
Net cash (used in) provided by operating activities
Cash flows from investing activities:
Asset acquisitions, primarily real estate, net of cash acquired
Investment in real estate
Equity investment
Investment in subsidiaries
Return of investment
Intercompany borrowings
Net cash (used in) provided by investing activities
Cash flows from financing activities:
Issuance of common stock, net
Stock issuance costs
Dividends paid
Intercompany borrowings
Proceeds from debt, net
Payments on debt
Payments on capital lease obligations and lease financing
arrangements
Interest paid by lenders on issuance of the senior notes
Tax payment upon exercise of equity awards
Contributions/distributions from parent
Net cash provided by (used in) financing activities
Effect of exchange rate changes on cash, cash equivalents and
restricted cash
Net (decrease) increase in cash, cash equivalents and restricted
cash
Cash, cash equivalents and restricted cash at beginning of period
—
—
—
—
— (103.6)
—
—
—
—
—
—
(700.0)
(7.0)
(829.5)
181.1
5.6
—
—
— (105.1)
(513.3)
(7.0)
(934.6)
699.6
—
—
—
—
—
(181.1)
— (181.1)
—
—
—
—
—
(5.2)
—
513.3
—
—
—
—
(5.6)
— 1,958.4
— (1,432.7)
—
—
—
7.0
7.0
—
—
—
—
—
—
700.0
1,039.0
(0.8)
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
421.6
(27.9)
19.2 $
309.3
— (462.8)
(814.6)
—
—
—
(6.8)
(31.9)
(12.6)
—
—
—
—
(19.2)
—
1,536.5
(181.1)
106.3
(462.8)
(865.7)
(12.6)
—
—
—
(821.4)
(507.3)
1,442.5
(1,341.1)
—
—
—
105.1
—
—
—
—
6.8
29.9
— (114.7)
(7.9)
(1.6)
—
—
178.6
275.8
—
—
650.9
571.3
—
0.4
(124.0)
151.2
36.5
0.7
—
—
699.6
—
181.1
(181.1)
(106.3)
—
— 1,988.3
— (1,547.4)
—
—
—
(1,536.5)
(9.5)
—
(5.2)
—
(1,461.7)
944.7
—
—
—
(0.4)
(87.5)
151.9
Cash, cash equivalents and restricted cash at end of period
$
— $ — $
— $
— $
27.2 $
37.2 $
— $
64.4
110
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
IN MILLIONS
Year Ended December 31, 2017
Net cash (used in) provided by operating activities
$
— $ — $
(60.3) $ — $
339.7 $
(0.6) $
10.7 $ 289.5
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
Cash flows from investing activities:
Asset acquisitions, primarily real estate, net of cash acquired
Investment in real estate
Equity investment
Investment in subsidiaries
Return of investment
Intercompany borrowings
—
—
—
—
—
—
—
—
—
(705.3)
(7.1)
(705.3)
145.7
6.5
—
—
— (598.8)
—
—
—
—
—
—
(492.3)
(903.8)
—
—
— (492.3)
(10.7)
(914.5)
— (100.0)
— (100.0)
(0.7)
—
—
—
—
0.5
1,418.4
(145.7)
591.8
—
—
—
Net cash (used in) provided by investing activities
(553.1)
(7.1)
(1,304.1)
— (1,396.8)
(99.5)
1,853.8 (1,506.8)
Cash flows from financing activities:
Issuance of common stock, net
Dividends paid
Intercompany borrowings
Proceeds from debt, net
Payments on debt
Payments on capital lease obligations and lease financing
arrangements
Interest paid by lenders on issuance of the senior notes
Tax payment upon exercise of equity awards
Contributions/distributions from parent
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and restricted cash
Cash, cash equivalents and restricted cash at beginning of period
705.7
—
—
(145.7)
— (145.7)
—
—
—
—
—
(6.9)
—
553.1
—
—
—
(6.5)
— 2,558.4
— (1,749.8)
—
—
—
7.1
7.1
—
—
—
2.7
—
705.3
1,364.4
—
—
—
—
—
—
—
—
—
—
—
—
—
598.2
—
—
—
—
—
—
—
— 705.7
145.7
(145.7)
(591.7)
—
— 2,558.4
— (1,749.8)
(8.6)
(1.2)
—
—
—
—
—
—
—
605.3
100.8
(1,418.5)
(9.8)
2.7
(6.9)
—
— 1,194.9
—
—
137.8
13.4
99.6
(0.5)
1.2
(1,864.5) 1,354.6
— 137.3
—
14.6
— $ 151.9
Cash, cash equivalents and restricted cash at end of period
$
— $ — $
— $ — $
151.2 $
0.7 $
111
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
IN MILLIONS
Year Ended December 31, 2016
Net cash (used in) provided by operating activities
$
— $
— $
(45.4) $
— $
221.8 $
— $
4.2 $ 180.6
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor
Subsidiaries
Non-
Guarantors
Eliminations/
Consolidations
Total
Cash flows from investing activities:
Asset acquisitions, primarily real estate, net of cash acquired
Investment in real estate
Investment in subsidiaries
Return of investment
Intercompany borrowings
—
—
—
—
—
—
(448.2)
(4.5)
(448.2)
112.3
15.3
—
—
—
(66.3)
Net cash (used in) provided by investing activities
(320.6)
(4.5)
(514.5)
Cash flows from financing activities:
Issuance of common stock, net
Dividends paid
Intercompany borrowings
Proceeds from debt, net
Payments on debt
Payments on capital lease obligations and lease financing
arrangements
Tax payment upon exercise of equity awards
Contributions/distributions from parent
Net cash provided by (used in) financing activities
Net increase (decrease) in cash, cash equivalents and
restricted cash
Cash, cash equivalents and restricted cash at beginning of
period
Cash, cash equivalents and restricted cash at end of
period
447.1
(112.3)
—
—
—
—
(14.2)
—
320.6
—
—
—
—
— (114.3)
—
—
(15.3)
701.3
— (460.0)
—
—
4.5
4.5
—
—
—
—
448.2
559.9
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
(131.1)
(598.9)
—
—
—
(730.0)
—
—
71.0
—
(1.5)
(8.0)
—
448.2
509.7
1.5
11.9
—
(1.1)
—
—
(0.5)
(1.6)
—
—
—
—
—
(1.1)
—
—
— (131.1)
— (600.0)
900.9
(112.3)
51.5
—
—
—
840.1
(731.1)
—
447.1
112.3
(114.3)
(55.7)
—
—
701.3
— (461.5)
—
—
(900.9)
(9.1)
(14.2)
—
(1.1)
(844.3)
549.3
(2.7)
3.9
—
—
(1.2)
15.8
$
— $
— $
— $
— $
13.4 $
1.2 $
— $
14.6
112
CYRUSONE INC.
Notes to Consolidated Financial Statements - (continued)
24. Quarterly Financial Information (Unaudited)
The table below reflects the unaudited selected quarterly information for the years ended December 31, 2018 and 2017:
IN MILLIONS, except per share amounts
Revenue
Operating income
Net income (loss)
Net income (loss) attributed to common shareholders
Basic income (loss) per share
Diluted income (loss) per share
IN MILLIONS, except per share amounts
Revenue
Operating income (loss)
Net (loss) income
Net (loss) income attributed to common stockholders
Basic and diluted (loss) income per share
$
$
$
First
Quarter
Second
Quarter
2018
Third
Quarter
Fourth
Quarter
Total
196.6 $
27.7
43.5
43.5
0.45
0.45
196.9 $
27.0
105.9
105.9
1.07
1.06
206.6 $
20.2
(42.4)
(42.4)
(0.43) $
(0.43)
221.3 $
14.8
(105.8)
(105.8)
(1.09) $
(1.08)
821.4
89.7
1.2
1.2
—
—
First
Quarter
Second
Quarter
2017
Third
Quarter
Fourth
Quarter
Total
149.3 $
19.8
(30.4)
(30.4)
(0.36) $
166.9 $
16.7
(0.8)
(0.8)
(0.01) $
175.3 $
(36.3)
(55.1)
(55.1)
(0.61) $
180.5 $
23.9
2.8
2.8
0.03 $
672.0
24.1
(83.5)
(83.5)
(0.95)
113
ITEM 9.
None.
CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
ITEM 9A.
CONTROLS AND PROCEDURES
Conclusion Regarding the Effectiveness of Disclosure Controls and Procedures
Under the supervision and with the participation of our management, including our Chief Executive Officer and the Chief Financial
Officer (our principal executive officer and principal financial officer, respectively), we have evaluated our disclosure controls
and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the Exchange
Act)) as of December 31, 2018. Based upon that evaluation, the Chief Executive Officer and the Chief Financial Officer have
concluded that, as of December 31, 2018, the Company’s disclosure controls and procedures were effective in ensuring information
required to be disclosed by the Company in reports that it files or submits under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in the rules and forms of the SEC and is accumulated and communicated to the
Company’s management, including the Chief Executive Officer and Chief Financial Officer, as appropriate to allow timely decisions
regarding required disclosure.
Management’s Annual Report on Internal Control Over Financial Reporting
Management is responsible for establishing and maintaining adequate internal control over financial reporting. Under the
supervision and with the participation of management, including the Chief Executive Officer and Chief Financial Officer,
management assessed the effectiveness of internal control over financial reporting as of December 31, 2018 based on the Internal
Control-Integrated Framework (2013) issued by the Committee of Sponsoring Organizations of the Treadway Commission. Based
on that assessment, management has concluded that our internal control over financial reporting was effective at December 31,
2018, to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of our financial
statements for external purposes in accordance with U.S. generally accepted accounting principles. Due to its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements.
Deloitte & Touche LLP, our independent registered public accounting firm, has audited our financial statements included in this
Annual Report on Form 10-K and has issued its attestation report on the effectiveness of our internal control over financial reporting
as of December 31, 2018.
Changes in Internal Control Over Financial Reporting
There has been no change in our internal control over financial reporting during the fourth quarter ended December 31, 2018, that
has materially affected, or is reasonably likely to materially affect, our internal control over financial reporting.
ITEM 9B.
OTHER INFORMATION
On February 18, 2019, the Amended and Restated Agreement of Limited Partnership of CyrusOne LP, dated as of May
2, 2016, by and among CyrusOne GP, a Maryland statutory trust, CyrusOne Inc., a Maryland corporation (the “Company”), and
any additional partner that is admitted from time to time to the partnership (the “Operating Partnership Agreement”), was amended
(the “First Amendment”) to (i) establish and set forth the terms of a new class of partnership units of CyrusOne LP, a Maryland
limited partnership (the “Operating Partnership”), designated as LTIP Units (the “LTIP Units”), and (ii) make conforming changes
and updates to certain provisions in connection with changes in law made by the Bipartisan Budget Act of 2015 relating to rules
applicable to U.S. federal tax audits of partnerships, which are generally effective for taxable years beginning after December 31,
2017.
The terms of the LTIP Units are specified in new Exhibit C to the Operating Partnership Agreement, which addresses,
among other things, vesting and forfeiture, allocations, distributions, redemption, conversion of partnership common units, voting
rights and restrictions on transfer. In general, LTIP Units are a class of partnership units of the Operating Partnership that, except
as may be otherwise provided in the Operating Partnership Agreement, the Plan (as defined below) or any applicable award
agreement, will be entitled to receive the same per unit distribution of operating income as the common units of the Operating
Partnership (“OP Units”). Initially, each LTIP Unit will have a capital account balance of zero and, therefore, will not have full
parity with OP Units with respect to liquidating distributions. However, the Operating Partnership Agreement provides that “book
gain,” or economic appreciation, in assets realized by the Operating Partnership as a result of the actual sale of all or substantially
all of the Operating Partnership’s assets or the revaluation of the Operating Partnership’s assets as provided by applicable U.S.
Department of Treasury regulations will be allocated first to the holders of LTIP Units until the capital account per LTIP Unit is
114
equal to the fair market value of a share of common stock of the Company, subject to certain adjustments. The Operating Partnership
Agreement provides that the Operating Partnership’s assets will be revalued upon the occurrence of certain events, including
additional capital contributions, a liquidation of the Operating Partnership or the issuance of a partnership interest (including LTIP
Units).
Upon equalization of the capital accounts of the holders of LTIP Units with the fair market value of the shares of common
stock of the Company, subject to certain adjustments, the LTIP Units will achieve full parity with the OP Units for all purposes,
including with respect to liquidating distributions. If such parity is reached, vested LTIP Units will be convertible into an equal
number of OP Units, and thereafter enjoy all the rights of OP Units. If a sale or revaluation of assets occurs at a time when the
Operating Partnership’s assets have appreciated sufficiently since the last revaluation, the LTIP Units would achieve full parity
with the OP Units upon such sale or revaluation. In the absence of sufficient appreciation in the value of the Operating Partnership’s
assets at the time of a sale or revaluation, full parity would not be reached. Consequently, an LTIP Unit may never convert into
an OP Unit if the value of the Operating Partnership’s assets has not appreciated sufficiently between revaluation dates to equalize
the capital account per LTIP Unit to the fair market value of a share of common stock of the Company, subject to certain adjustments.
Until and unless parity is reached, the value for a given number of vested LTIP Units will be less than the value of an equal number
of shares of common stock of the Company.
With respect to LTIP Units that convert into OP Units, the Operating Partnership Agreement provides that holders of OP
Units are generally entitled to receive distributions on a pro rata basis in accordance with their respective OP Units (subject to the
rights of the holders of any class of preferred partnership interests that may be authorized and issued in the future). A limited
partner or an assignee generally has the right, commencing on or after the date which is 12 months after its acquisition of OP
Units, to require the Operating Partnership to redeem part or all of such OP Units for cash based upon the fair market value of an
equivalent number of shares of the Company’s common stock at the time of the redemption, determined in accordance with and
subject to adjustment as provided in the Operating Partnership Agreement. Alternatively, the Company may elect to acquire those
OP Units in exchange for shares of the Company’s common stock. The Company’s acquisition will be on a one-for-one basis,
subject to adjustment in the event of stock splits, stock dividends, distributions of warrants or stock rights, specified extraordinary
distributions and similar events. Pursuant to the terms of the First Amendment, holders of LTIP Units shall not be entitled to this
redemption right unless, until and to the extent such LTIP Units have been converted into OP Units.
On February 18, 2019, the Board of Directors (the “Board”) of the Company approved the amendment and restatement
of the CyrusOne Restated 2012 Long Term Incentive Plan, originally effective November 15, 2012 and subsequently amended
and restated effective May 2, 2016 (as amended and restated on February 18, 2019, the “Plan”) to provide for awards of LTIP
Units. Under the Plan, the Compensation Committee (the “Committee”) is authorized to grant LTIP Units to Plan participants in
such amounts and subject to such terms and conditions as may be determined by the Committee. Such terms and conditions may
include time-based and performance-based vesting conditions, as well as limitations on distributions on account of the LTIP Units
prior to vesting. The LTIP Units are intended to constitute “profits interests” within the meaning of the Internal Revenue Code of
1986, as amended. The Committee will specify the conditions and dates upon which the LTIP Units shall vest and become
nonforfeitable. In addition to any terms and conditions that are specified by the Committee, the LTIP Units shall be subject to the
terms and conditions of the Operating Partnership Agreement and such other restrictions, including restrictions on transferability
(including by redemption or conversion), as the Committee may impose.
The foregoing description of the First Amendment and the Plan is qualified in its entirety by reference to the full text of
the First Amendment and the Plan, which are filed herewith as Exhibits 10.3 and 10.36 and incorporated herein by reference.
115
PART III
Item 10. Directors, Executive Officers and Corporate Governance
The information required by this item can be found in the Proxy Statement for the 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
The Company has a Code of Business Conduct and Ethics that applies to all employees, including the Company’s principal
executive officer, principal financial officer, and principal accounting officer, as well as to the members of the Board of Directors
of the Company. The code is available at investor.cyrusone.com/corporate-governance. The Company intends to disclose any
changes in, or waivers from, this code by posting such information on the same website or by filing a Form 8-K, in each case to
the extent such disclosure is required by rules of the SEC or NASDAQ.
Items 11. Executive Compensation
The information required by this item can be found in the Proxy Statement for the 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
Items 12. Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters
The information required by this item can be found in the Proxy Statement for the 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 13. Certain Relationships and Related Transactions, and Director Independence
The information required by this item can be found in the Proxy Statement for the 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
Item 14. Principal Accountant Fees and Services
The information required by this item can be found in the Proxy Statement for the 2019 Annual Meeting of Shareholders and is
incorporated herein by reference.
PART IV
ITEM 15.
EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a)
included in this report:
Consolidated Financial Statements and Schedules. The following consolidated financial statements and schedules are
(1)
FINANCIAL STATEMENTS
The response to this portion of Item 15 is submitted under Item 8 of this Annual Report on Form 10-K.
(2)
FINANCIAL STATEMENT SCHEDULES
Schedule II—Valuation and Qualifying Accounts
Schedule III—Consolidated Real Estate and Accumulated Depreciation. The response to this portion of Item 15 is required to be
filed by Item 8 of this Annual Report on Form 10-K.
All other schedules for which provision is made in the applicable accounting regulations of the SEC are not required under the
related instructions or are inapplicable and therefore have been omitted.
(3)
EXHIBITS
See the accompanying Exhibit Index.
Exhibits may be obtained from us upon request at a charge that reflects the reproduction cost of such Exhibits. Requests should
be made to the Secretary of CyrusOne Inc., 2101 Cedar Springs Road, Suite 900, Dallas, Texas 75201. Exhibits are also available,
free of charge, on the SEC's website at www.sec.gov.
ITEM 16.
FORM 10-K SUMMARY
None.
116
Schedule II.
(dollars in millions)
Allowance for Doubtful Accounts
2018
2017
2016
Deferred Tax Valuation Allowance
2018
2017
2016
Valuation and Qualifying Accounts
Beginning
of Period
Charge
to Expenses
(Deductions)/
Additions
End
of Period
$
$
2.1 $
2.1
1.0
2.3 $
0.2
1.6
7.2 $
(0.3) $
6.5
6.3
0.7
0.2
(2.7) $
(0.2)
(0.5)
— $
—
—
1.7
2.1
2.1
6.9
7.2
6.5
117
Schedule III. Real Estate Properties and Accumulated Depreciation
CyrusOne Inc.
(dollars in millions)
Initial Costs
As of December 31, 2018
Cost Capitalized Subsequent to
Acquisition
Gross Carrying Amount
Description
Dallas - Carrollton
Houston - Houston West I
Northern Virginia - Sterling II
San Antonio III
Cincinnati - 7th Street
Northern Virginia - Sterling V
Northern Virginia - Sterling VI
Somerset I
Dallas - Lewisville
Totowa - Madison
Chicago - Aurora I
Cincinnati - North Cincinnati
Phoenix - Chandler II
Wappingers Falls I
San Antonio I
Houston - Houston West II
Phoenix - Chandler I
Phoenix - Chandler III
Northern Virginia - Sterling I
Raleigh-Durham I
Houston - Galleria
Phoenix - Chandler VI
Northern Virginia - Sterling III
Frankfurt I
Austin II
San Antonio II
Florence
Austin III
Phoenix - Chandler IV
San Antonio IV
Cincinnati - Hamilton
Northern Virginia - Sterling IV
Phoenix - Chandler V
London II
London I
Stamford - Riverbend*
Cincinnati - Mason
Cincinnati - Blue Ash*
Houston - Houston West III
Norwalk I*
Chicago - Lombard
Stamford - Omega*
Cincinnati - Goldcoast*
Totowa - Commerce
South Bend - Crescent
South Bend - Monroe
Singapore - Inter Business Park*
Chicago - Aurora II
Chicago - Aurora Tower
Land
Building and
Improvements Equipment
Land
Building and
Improvements
Equipment
Land
Building and
Improvements Equipment
Accumulated
Depreciation Acquisition
$
16.1 $
— $
— $
— $
62.2 $
272.5 $
16.1 $
62.2 $
272.5 $
104.0
1.4
—
—
0.9
14.5
—
12.1
—
—
2.4
0.9
—
—
4.6
2.0
10.5
—
6.9
2.1
—
2.3
—
21.4
—
—
42.2
—
—
124.6
46.2
28.3
26.0
12.3
—
9.9
3.0
—
—
0.9
—
73.5
56.0
—
—
0.1
—
—
—
—
—
83.3
2.2
45.6
97.3
—
—
13.3
—
—
—
2.5
—
71.3
2.0
—
—
11.2
31.0
106.2
2.0
6.7
2.2
3.3
—
—
—
4.6
—
—
—
—
—
—
7.1
—
0.7
—
0.6
—
—
—
—
2.6
—
—
—
7.7
—
—
—
9.5
9.6
—
19.9
25.3
4.3
—
2.6
—
—
—
—
—
—
—
—
0.1
—
58.7
20.5
13.2
—
—
—
18.3
25.3
3.2
3.2
—
4.1
1.1
—
9.0
—
—
—
0.6
—
0.8
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
—
0.7
—
—
—
—
—
0.1
—
—
—
0.3
—
—
—
—
—
—
—
—
—
—
—
—
0.1
—
—
—
(0.4)
—
—
—
—
—
—
63.8
28.8
40.2
71.9
80.8
—
1.2
30.6
0.2
6.4
65.6
16.2
1.4
28.7
22.9
58.3
10.5
20.2
6.3
15.0
23.3
22.2
94.5
23.4
30.3
34.3
11.7
18.4
42.1
34.2
10.4
10.7
5.3
8.8
(1.4)
20.3
(1.9)
18.0
(4.7)
1.5
(0.6)
4.0
—
0.6
2.5
(9.0)
22.6
4.9
51.0
112.4
99.0
37.4
295.8
77.5
7.7
37.4
12.1
35.6
12.4
39.4
8.7
35.3
50.9
68.7
48.3
60.4
4.1
18.2
100.3
61.3
72.6
8.7
60.8
8.4
47.0
43.3
48.2
7.9
75.9
53.4
16.1
5.8
(5.4)
1.7
0.2
31.4
(15.2)
8.1
0.1
0.1
0.9
0.2
0.4
—
68.6
0.4
1.4
—
—
0.9
14.5
—
12.1
—
—
2.4
0.9
—
—
4.6
2.7
10.5
—
6.9
2.1
—
2.4
—
85.2
28.8
40.2
114.1
80.8
—
125.8
76.8
28.5
32.4
77.9
16.2
11.3
31.7
22.9
58.3
11.4
20.2
79.8
71.0
23.3
22.2
11.2
125.5
2.0
7.0
2.2
3.3
—
—
—
4.6
—
—
—
—
—
—
7.2
—
0.7
—
0.2
—
—
—
—
2.6
—
23.4
30.3
42.0
11.7
18.4
42.1
43.7
20.0
10.7
25.2
34.1
2.9
20.3
0.7
18.0
13.6
4.7
2.6
4.0
4.1
1.7
2.5
—
22.6
4.9
51.1
112.4
99.0
37.4
295.8
77.5
91.0
39.6
57.7
132.9
12.4
39.4
22.0
35.3
50.9
68.7
50.8
60.4
75.4
20.2
100.3
61.3
178.8
8.7
60.8
8.4
47.0
43.3
48.2
7.9
76.0
53.4
74.8
26.3
7.8
1.7
0.2
31.4
10.1
8.1
0.7
0.1
1.7
0.2
0.4
—
68.6
0.4
83.2
26.8
19.5
93.3
26.0
0.9
27.0
70.7
29.4
40.4
42.2
20.0
13.8
30.9
33.7
45.1
11.6
24.6
21.8
56.0
10.4
12.5
5.3
16.9
17.5
32.7
11.3
6.8
5.4
29.9
12.9
4.0
4.4
1.3
5.0
14.8
0.5
9.7
4.5
7.7
0.7
3.1
1.3
1.8
1.8
—
7.1
0.1
2012
2010
2013
2017
1999
2016
2018
2017
2010
2015
2016
2008
2014
2015
2011
2013
2011
2016
2013
2017
2010
2016
2017
2018
2011
2013
2005
2015
2017
2017
2007
2016
2017
2018
2018
2015
2004
2009
2013
2015
2008
2015
2007
2015
2008
2007
2011
2016
2018
118
(dollars in millions)
Initial Costs
Cost Capitalized Subsequent to
Acquisition
Gross Carrying Amount
Description
London - Great Bridgewater
Land
—
Building and
Improvements Equipment
Land
Building and
Improvements
Equipment
Land
Building and
Improvements Equipment
Accumulated
Depreciation Acquisition
16.5
—
—
10.3
1.2
—
26.8
1.2
4.2
2011
$ 117.7 $
609.6 $
543.0 $
0.8 $
1,067.9 $ 2,087.2 $ 118.5 $
1,677.5 $ 2,630.2 $
1,054.5
Land held for future development
$ 176.4 $
— $
— $
— $
— $
— $
176.4 $
— $
— $
—
The aggregate cost of the total properties for federal income tax purposes was $6,186.5 million at December 31, 2018. In addition, Construction in progress was $744.9 million as we
continue to build data center facilities.
* Reductions in Cost Capitalized Subsequent to Acquisition due to impairment losses recorded for the respective facility.
119
Historical Cost and Accumulated Depreciation and Amortization
The following table reconciles the historical cost and accumulated depreciation for the years ended December 31, 2018, 2017 and 2016.
(amounts in millions)
Property
Balance—beginning of period
Disposals
Impairments
Additions (acquisitions and improvements)
Balance, end of period(1)
Accumulated Depreciation
Balance—beginning of period
Disposals
Impairments
Additions (depreciation and amortization expense)
Balance, end of period
Years Ended December 31,
2018
2017
2016
$
$
$
$
3,840.8 $
(20.8)
—
1,527.5
5,347.5 $
782.4 $
(14.0)
—
286.1
1,054.5 $
2,601.6 $
(3.4)
(71.8)
1,314.4
3,840.8 $
578.5 $
(1.9)
(14.1)
219.9
782.4 $
1,827.6
(12.0)
(4.9)
790.9
2,601.6
435.6
(7.9)
—
150.8
578.5
(1) - Includes construction-in-progress of $744.9 million and $487.1 million for the years ended December 31, 2018 and 2017, respectively that is
not included in amounts reflected above in Schedule III.
120
EXHIBIT INDEX
Exhibit #
Exhibit Description
2.1 Agreement and Plan of Merger, dated April 28, 2015 by and among CyrusOne LP, Jupiter Merger Sub, LLC,
Cervalis Holdings LLC, and LDG Holdings LLC as the sellers' representative. (Incorporated by reference to
Exhibit 2.1 of Form 8-K, filed by the Registrant on April 28, 2015 (Registration No. 001-35789)).
2.2 Transaction Agreement, dated as of February 4, 2017, by and among Sentinel Properties - Durham, LLC, Russo-
Somerset, LLC, Sentinel Properties - Franklin, LLC, Sentinel NC-1, LLC, 800 Cottontail, LLC and CyrusOne LP
(Incorporated by reference to Exhibit 2.1 of Form 10-Q, filed by the Registrant on May 10, 2017 (Registration
No. 001-35789)).
2.3 Share Purchase Agreement, dated as of October 18, 2017, between Cheetah Asia Holdings LLC, CyrusOne LLC
and GDS Holdings Limited (Incorporated by reference to Exhibit 2.1 of Form 8-K, filed by the Registrant on
October 24, 2017 (Registration No. 001-35789)).
2.4(a) Sale and Purchase Agreement dated December 21, 2017 among Zenium Topco Limited, CyrusOne Dutch
Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto (Incorporated by
reference to Exhibit 99.1 of Form 8-K, filed by the Registrant on December 28, 2017 (Registration No.
001-35789)).
2.4(b) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated April 20, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on April 27,
2018 (Registration No. 001-35789)).
2.4(c) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated April 26, 2018 (Incorporated by reference to Exhibit 99.2 of Form 8-K, filed by CyrusOne Inc. on April 27,
2018 (Registration No. 001-35789)).
2.4(d) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated May 17, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on May 21,
2018 (Registration No. 001-35789)).
2.4(e) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated May 25, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on May 29,
2018 (Registration No. 001-35789)).
2.4(f) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated June 28, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on June 29,
2018 (Registration No. 001-35789)).
2.4(g) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated July 19, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on July 20,
2018 (Registration No. 001-35789)).
2.4(h) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated July 27, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on July 30,
2018 (Registration No. 001-35789)).
2.4(i) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated August 10, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on August
13, 2018 (Registration No. 001-35789)).
2.4(j) Extension Letter to Sale and Purchase Agreement dated December 21, 2017 among Zenium TopCo Limited,
CyrusOne Dutch Holdings B.V., ZTP Seller Rep, LLC, CyrusOne LP and certain other sellers named thereto
dated August 15, 2018 (Incorporated by reference to Exhibit 99.1 of Form 8-K, filed by CyrusOne Inc. on August
17, 2018 (Registration No. 001-35789)).
3.1 Articles of Amendment and Restatement of CyrusOne Inc. (Incorporated by reference to Exhibit 3.1 of Form 8-
K, filed by the Registrant on January 25, 2013 (Registration No. 001-35789)).
121
3.2 Amended and Restated Bylaws of CyrusOne Inc. (Incorporated by reference to Exhibit 3.1 of Form 8-K, filed by
the Registrant on March 17, 2017 (Registration No. 001-35789)).
4.1(a) Indenture, dated as of March 17, 2017, by and among CyrusOne LP and CyrusOne Finance Corp., as issuers, the
guarantors party thereto and Wells Fargo Bank, N.A., as trustee, relating to the 5.000% Senior Notes due 2024
(Incorporated by reference to Exhibit 4.1 of Form 8-K, filed by the Registrant on March 17, 2017 (Registration
No. 001-35789)).
4.1(b)+ First Supplemental Indenture dated as of October 2, 2018, by and among C1-Allen LLC, C1-ATL LLC, C1-Mesa
LLC, C1-Sterling VIII LLC, Warhol TRS LLC, Warhol Partnership LLC, Warhol REIT LLC, C1-Santa Clara
LLC, CyrusOne LP,CyrusOne Finance Corp., the other guarantors party thereto and Wells Fargo Bank, N.A., as
trustee, relating to the 5.000%Senior Notes due 2024.
4.2(a) Indenture, dated as of March 17, 2017, by and among CyrusOne LP and CyrusOne Finance Corp., as issuers, the
guarantors party thereto and Wells Fargo Bank, N.A., as trustee, relating to the 5.375% Senior Notes due 2027
(Incorporated by reference to Exhibit 4.2 of Form 8-K, filed by the Registrant on March 17, 2017 (Registration
No. 001-35789)).
4.2(b)+ First Supplemental Indenture dated as of October 2, 2018, by and among C1-Allen LLC, C1-ATL LLC, C1-Mesa
LLC, C1-Sterling VIII LLC, Warhol TRS LLC, Warhol Partnership LLC, Warhol REIT LLC, C1-Santa Clara
LLC, CyrusOneLP,CyrusOne Finance Corp., the other guarantors party thereto and Wells Fargo Bank, N.A., as
trustee, relating to the 5.375%Senior Notes due 2027.
4.3 Form of Certificate for Common Stock of CyrusOne Inc. (Incorporated by reference to Exhibit 4.1 of
Amendment No. 5 to the Registrant’s Registration Statement on Form S-11/A, filed by the Registrant on
December 13, 2012 (Registration No. 333-183132)).
10.1 Certificate of Limited Partnership of CyrusOne LP (Incorporated by reference to Exhibit 3.3 of Form S-4, filed
by CyrusOne LP on October 28, 2015 (Registration No. 333-207647)).
10.2 Amended and Restated Limited Partnership Agreement of CyrusOne LP (Incorporated by reference to Exhibit
10.1 of Form 8-K, filed by CyrusOne Inc. on May 4, 2016 (Registration No. 001-35789)).
10.3+ First Amendment to the Amended and Restated Agreement of Limited Partnership of CyrusOne LP, dated as of
February 18, 2019.
10.4(a) Second Amended and Restated Credit Agreement, dated as of November 21, 2016, among CyrusOne LP, the
lenders party thereto, KeyBank National Association, as agent for the lenders, JPMorgan Chase Bank, N.A., as
syndication agent, and KeyBanc Capital Markets Inc., JPMorgan Chase Bank, N.A. and TD Securities (USA)
LLC, as joint lead arrangers and joint bookrunners (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed
by CyrusOne Inc. on November 23, 2016 (Registration No. 001-35789)).
10.4(b) First Amendment to Second Amended and Restated Credit Agreement and Other Loan Documents, dated as of
June 16, 2017, among CyrusOne LP, CyrusOne Inc., CyrusOne GP, CyrusOne LLC, CyrusOne TRS Inc.,
CyrusOne Foreign Holdings LLC, CyrusOne Finance Corp., Cervalis Holdings LLC, Cervalis LLC, CyrusOne-
NJ LLC, CyrusOne-NC LLC, the lenders party thereto, and KeyBank National Association, as agent for the
lenders from time to time party to the Credit Agreement (Incorporated by reference to Exhibit 10.1 of Form 8-K,
filed by the Registrant on June 19, 2017 (Registration No. 001-35789)).
10.5(a) Credit Agreement, dated as of March 29, 2018, among CyrusOne LP, the subsidiary borrowers party thereto, the
lenders party thereto, JPMorgan Chase Bank, N.A., as administrative agent for the lenders, KeyBank National
Association, as syndication agent, and JPMorgan Chase Bank, N.A., KeyBanc Capital Markets Inc., Barclays
Bank PLC, RBC Capital Markets, LLC and TD Securities (USA) LLC, as joint lead arrangers and joint
bookrunners (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed by the Registrant on April 4, 2018
(Registration No. 001-35789)).
10.5(b)+ Joinder Agreement dated as of October 2, 2018, by and among C1-Allen LLC, C1-ATL LLC, C1-Mesa LLC, C1-
Sterling VIII LLC, Warhol TRS LLC, Warhol Partnership LLC, Warhol REIT LLC, C1-Santa Clara LLC and
acknowledged by JPMorgan Chase Bank, N.A., relating to the Credit Agreement, dated as of March 29, 2018,
among CyrusOne LP, the subsidiary borrowers party thereto, the lenders party thereto, JPMorgan Chase Bank,
N.A., as administrative agent for the lenders,KeyBank National Association, as syndication agent, and JPMorgan
Chase Bank, N.A., KeyBanc Capital Markets Inc.,Barclays Bank PLC, RBC Capital Markets, LLC and TD
Securities (USA) LLC, as joint lead arrangers and joint bookrunners.
122
10.6 Form of 2018 Sales Agreement, dated February 27, 2018, by and among CyrusOne Inc., CyrusOne GP, CyrusOne
LP and eachof Barclays Capital Inc., Deutsche Bank Securities Inc., Goldman Sachs & Co. LLC, Jefferies LLC,
KeyBanc Capital MarketsInc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Morgan Stanley & Co. LLC,
Raymond James & Associates, Inc.,RBC Capital Markets, LLC, Stifel, Nicolaus & Company, Incorporated and
SunTrust Robinson Humphrey, Inc. (Incorporatedby reference to Exhibit 1.1 of Form 8-K, filed by the Registrant
on February 27, 2018 (Registration No. 001-35789)).
10.7 Forward Sale Agreement, dated September 25, 2018, between CyrusOne Inc. and Morgan Stanley & Co. LLC
(Incorporated by reference to Exhibit 1.2 of Form 8-K, filed by CyrusOne Inc. on October 1, 2018 (Registration
No. 001-35789)).
10.8 Form of Forward/Primary Sales Agreement, dated November 19, 2018, by and among CyrusOne Inc., CyrusOne
GP, CyrusOne LP and each of Barclays Capital Inc., BMO Capital Markets Corp., Deutsche Bank Securities Inc.,
Goldman Sachs & Co. LLC,Jefferies LLC, KeyBanc Capital Markets Inc., Merrill Lynch, Pierce, Fenner & Smith
Incorporated, Morgan Stanley & Co.LLC, MUFG Securities Americas Inc., Raymond James & Associates, Inc.
and RBC Capital Markets, LLC (Incorporated by reference to Exhibit 1.1 of Form 8-K, filed by CyrusOne Inc.
on November 19, 2018 (Registration No. 001-35789)).
10.9 Form of Primary Sales Agreement, dated November 19, 2018, by and among CyrusOne Inc., CyrusOne GP,
CyrusOne LP and each of Capital One Securities, Inc., Stifel, Nicolaus & Company, Incorporated, SunTrust
Robinson Humphrey, Inc. and TD Securities (USA) LLC (Incorporated by reference to Exhibit 1.2 of Form 8-K,
filed by CyrusOne Inc. on November 19, 2018(Registration No. 001-35789)).
10.10(a) Form of Indemnification Agreement between CyrusOne Inc. and its directors and officers. (Incorporated by
reference to Exhibit 10.5 of Amendment No. 5 to the Registrant’s Registration Statement on Form S-11/A, filed
by the Registrant on December 13, 2012 (Registration No. 333-183132)).
10.10(b) Form of Indemnification Agreement between CyrusOne Inc. and its directors and officers. (Incorporated by
reference to Exhibit 10.1 of Form 8-K, filed by CyrusOne Inc. on July 27, 2016 (Registration No. 001-35789)).
10.11† CyrusOne 2012 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.7 of Amendment No. 3 to the
Registrant’s Registration Statement on Form S-11/A, filed by the Registrant on November 16, 2012 (Registration
No. 333-183132)).
10.12† CyrusOne 2013 Short Term Incentive Plan (Incorporated by reference to Exhibit 10.8 of Amendment No. 3 to the
Registrant’s Registration Statement on Form S-11/A, filed by the Registrant on November 16, 2012 (Registration
No. 333-183132)).
10.13† Employment Agreement, dated as of January 24, 2013, by and between CyrusOne LLC and Gary J. Wojtaszek
(Incorporated by reference to Exhibit 10.5 of Form 8-K, filed by the Registrant on January 29, 2013 (Registration
No. 001-35789)).
10.14† Employment Agreement, dated as of January 24, 2013, by and between CyrusOne LLC and Kevin L. Timmons
(Incorporated by reference to Exhibit 10.8 of Form 8-K, filed by the Registrant on January 29, 2013 (Registration
No. 001-35789)).
10.15† Employment Agreement, dated as of January 24, 2013, by and between CyrusOne LLC and Venkatesh S.
Durvasula (Incorporated by reference to Exhibit 10.18 of Form 10-K, filed by the Registrant on March 29, 2013
(Registration No. 001-35789)).
10.15(a)†+ Long-Term International Assignment Letter, dated October 30, 2018, by and between CyrusOne LLC and
Venkatesh S. Durvasula.
10.15(b)†
+
Offer Letter, dated as of November 6, 2018, by and between CyrusOne LLC and Venkatesh S. Durvasula.
10.16† Employment Agreement dated as of July 31, 2015, by and between CyrusOne LLC and Robert M. Jackson
(Incorporated by reference to Exhibit 10.1 of Form 8-K, filed by the Registrant on August 3, 2015 (Registration
No. 001-35789)).
10.17† Employment Agreement, dated as of July 31, 2015, by and between CyrusOne LLC and Amitabh Rai
(Incorporated by reference to Exhibit 10.3 of Form 8-K, filed by CyrusOne Inc. on August 3, 2015 (Registration
No. 001-35789)).
10.18† Form of Executive Non-Statutory Performance Stock Option Award under the provisions of the CyrusOne 2012
Long Term Incentive Plan (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed by the Registrant on
April 22, 2013 (Registration No. 001-35789)).
10.19† Form of Employee Non-Statutory Performance Stock Option Award under the provisions of the CyrusOne 2012
Long Term Incentive Plan (Incorporated by reference to Exhibit 10.2 of Form 8-K, filed by the Registrant on
April 22, 2013 (Registration No. 001-35789)).
123
10.20† Form of Executive Time-Based Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.7 of Form 10-Q, filed by CyrusOne Inc. on August 7,
2015 (Registration No. 001-35789)).
10.21† Form of Executive Performance Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.8 of Form 10-Q, filed by CyrusOne Inc. on August 7,
2015 (Registration No. 001-35789)).
10.22† Form of Executive Non-Statutory Stock Option Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.9 of Form 10-Q, filed by CyrusOne Inc. on August 7,
2015 (Registration No. 001-35789)).
10.23† Form of Employee Time-Based Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.3 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789)).
10.24† Form of Director Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term Incentive Plan
(Incorporated by reference to Exhibit 10.4 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016 (Registration
No. 001-35789))
10.25† Form of Executive Non-Statutory Stock Option Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.5 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789))
10.26† Form of Executive Performance Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.6 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789))
10.27† Form of Executive Time-Based Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.7 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789))
10.28† Form of Executive Retention Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.8 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789))
10.29† Form of Employee Retention Restricted Stock Award under the provisions of the CyrusOne 2012 Long Term
Incentive Plan (Incorporated by reference to Exhibit 10.9 of Form 10-Q, filed by CyrusOne Inc. on May 6, 2016
(Registration No. 001-35789)).
10.30† Employment Agreement, dated as of November 14, 2016, by and between CyrusOne LLC and Diane M.
Morefield (Incorporated by reference to Exhibit 10.1 of Form 8-K, filed by CyrusOne Inc. on October 31, 2016
(Registration No. 001-35789))
10.31† CyrusOne Restated 2012 Long Term Incentive Plan (Incorporated by reference to Exhibit 99.1 of Form S-8, filed
by CyrusOne Inc. on July 1, 2016 (Registration No. 001-35789)).
10.32† Form of Time-Based Restricted Stock Award under the Restated CyrusOne 2012 Long Term Incentive Plan
(Incorporated by reference to Exhibit 10.42 of Form 10-K/A, filed by CyrusOne Inc. on February 28, 2017
(Registration No. 001-35789))
10.33† Form of Director Restricted Stock Award under the provisions of the CyrusOne Restated 2012 Long Term
Incentive Plan. (Incorporated by reference to Exhibit 10.1 of Form 10-Q, filed by CyrusOne Inc. on May 10,
2017 (Registration No. 001-35789)).
10.34† Form of Executive Time-Based Restricted Stock Unit Award under the provisions of the CyrusOne Restated 2012
Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.2 of Form 10-Q, filed by CyrusOne Inc. on
May 10, 2017 (Registration No. 001-35789)).
10.35† Form of Executive Performance-Based Restricted Stock Unit Award under the provisions of the CyrusOne
Restated 2012 Long Term Incentive Plan. (Incorporated by reference to Exhibit 10.3 of Form 10-Q, filed by
CyrusOne Inc. on May 10, 2017 (Registration No. 001-35789)).
10.36†+ CyrusOne Restated 2012 Long Term Incentive Plan (as amended and restated February 18, 2019).
21.1+ Subsidiaries of the Registrant
23.1+ Consent of Deloitte & Touche LLP
31.1+ Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
124
31.2+ Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of
2002.
32.1+ Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
32.2+ Certification pursuant to 18 U.S.C. § 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of
2002.
(101.INS)* XBRL Instance Document.
(101.SCH)* XBRL Taxonomy Extension Schema Document.
(101.CAL)* XBRL Taxonomy Extension Calculation Linkbase Document.
(101.DEF)* XBRL Taxonomy Extension Definition Linkbase Document.
(101.LAB)* XBRL Taxonomy Extension Label Linkbase Document.
(101.PRE)* XBRL Taxonomy Extension Presentation Linkbase Document.
+ Filed herewith.
* Submitted electronically with this report.
† This exhibit is a management contract or compensation plan or arrangement.
125
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this
report to be signed on its behalf by the undersigned thereunto duly authorized, on the 22nd day of February, 2019, and this report
has been signed below on such date by the following persons on behalf of the registrant and in the capacities indicated.
SIGNATURES
CyrusOne Inc.
By:
/s/ Gary J. Wojtaszek
Gary J. Wojtaszek
President, Chief Executive Officer, and Director
(Principal Executive Officer)
By:
/s/ Diane M. Morefield
Diane M. Morefield
Executive Vice President and Chief Financial Officer
(Principal Financial Officer)
By:
/s/ Mark E. Skomal
Mark E. Skomal
Senior Vice President and Chief Accounting Officer
(Principal Accounting Officer)
126
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below by the following persons
on behalf of the registrant and in the capacities and on the date indicated.
Signature
Title
Date
/s/ Gary J. Wojtaszek
Gary J. Wojtaszek
/s/ Alex Shumate
Alex Shumate
/s/ David H. Ferdman
David H. Ferdman
/s/ John W. Gamble Jr.
John W. Gamble Jr.
/s/ Michael A. Klayko
Michael A. Klayko
/s/ T. Tod Nielsen
T. Tod Nielsen
/s/ William E. Sullivan
William E. Sullivan
/s/ Lynn Wentworth
Lynn Wentworth
President, Chief Executive Officer
February 22, 2019
and Director
Chairman of the Board of Directors
February 22, 2019
Director
Director
February 22, 2019
February 22, 2019
Director
February 22, 2019
Director
Director
February 22, 2019
February 22, 2019
Director
February 22, 2019
127
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2018 ANNUAL REPORT
CyrusOne.com