JDP Capital Management, a value-oriented hedge fund founded by Jeremy Deal, Wide-Moat Investing Summit presentation on CyrusOne Inc (NASDAQ:CONE).

JDP Capital Overview

  • Value-oriented hedge fund founded in October 2011 by Jeremy Deal
  • Seeded by Bay-Area families
  • Focused on Mid and Micro cap U.S. equities including distressed, special situations, mispriced growth
  • Concentrated, no leverage, target 100% long-term capital gains
  • Fund IRR 30% gross and 22% net, since inception

Summary investment thesis

  1. 33% upside due to special situation despite recent run up, 60% – 80% upside over 18 months
  2. Highest quality, least leveraged data center REIT growing earnings 20%+ annually
  3. Wide moat will protect low-20s unleveraged IRR on stabilized data center portfolio
  4. Attractive valuation caused by perceived control shareholder sell overhang and limited public float
  5. Undeveloped capacity to grow footprint by 400% organically

Idea background

  • Discovered while reading Ted Weschler’s last 13F before he joined Berkshire Hathaway in 2011
  • Cincinnati Bell Inc. (NYSE:CBB) was one of 8 stocks Ted held
  • CyrusOne Inc (NASDAQ:CONE) was a high-growth gem within overleveraged-CBB, management was discussing monetization
  • JDP started acquiring CyrusOne Inc after the IPO in early 2013
  • Became our second largest holding in January 2014, average cost $20.50 per share, 3-year investment horizon

CyrusOne (NASDAQ: CONE)

  • Dallas-based REIT focused on building and operating data centers for Fortune 1000-sized customers
  • 25 data centers, 2 million rentable square feet (NRSF)
  • Footprint concentrated in Texas, Cincinnati, Chicago, Phoenix, Northern VA

CyrusOne Valuation

CBB controlled, IPO in January 2013

  • 11-year operating history, formed through rollup of CBB data centers, GramTel and Cyrus Networks
  • Heritage within oil & gas industry, 1/3 sales today
  • 630 customers, 135 Fortune 1000
  • Cincinnati Bell Inc. (NYSE:CBB) owned 65.9% of stock at IPO, sold 16 million shares last week for $23.25, ownership reduced to ~41%
  • Prevailing “control discount” beginning to reverse

Attractive development economics

CyrusOne Q1 2014, Earnings Presentation

Strong macro: Leveraged to Big Data growth

Rapidly increasing value of a company’s data has changed the relevance of IT infrastructure

CyrusOne big data growth

CyrusOne’s Wide Moat

Economics are forcing data center outsourcing

  • Role of big-company CIO has evolved, big data is king
  • Estimated only 10% of Fortune 1000 has 100% outsourced data centerfootprint
  • CyrusOne Inc (NASDAQ:CONE) delivers 1 megawatt for ~1/3 the price with substantially lower ongoing costs due to the need for continuous low occupancy
  • Some cases 6x more to develop and manage in-house vs. outsource

Unique vertical relative to peers

  • CyrusOne Inc (NASDAQ:CONE)’s oil and gas roots set stage for other large non-tech enterprises to outsource infrastructure for all applications
  • Consumer-leveraged cloud providers like Google, Amazon, IBM, others, focus on smaller businesses needing plug-and-play space, goal to eventually sell other non-data center products
  • Other non-CyrusOne Inc (NASDAQ:CONE) example verticals:
    • Sale/leaseback data center model, few, large tech customers, passive
    • Super high latency-sensitive, network dependent portion of a company’s applications only

Excellent reputation creates high barrier to entry

  • High costs and outsized business risk to switch data center footprint
  • Average 5-year contracts with escalators, ~3% annually
  • Lease terms evolve materially over time due to changes in square footage, power and connectivity requirements
  • Low churn provides stable earnings stream, implied 20+ year duration

Cone Annaul churn

Direct sales model drives high returns on capital

  • Development pipeline driven by “advanced stage” sales pipeline, just in-time construction
  • Total control of sales process leads to maximized capital allocation
  • Tenured relationships allow for ultra customized designs
  • Pricing varies up to 5x between lowest and highest, driven by customer size, power density requirements, length of contract, resiliency, etc.

Customer depends on CyrusOne Inc to support growth

  • 60% of CyrusOne Inc (NASDAQ:CONE) growth is derived from existing customers
  • Big data growth often outpaces fundamental growth of large enterprises
  • Additional space, power and cooling always needs to be available
  • Inter-exchange product further connects customers

Critical mass drives efficiencies and IRR

  • Proven ability to maintain development yields despite declining costs to build
  • Scale allows ability to maintain unoccupied space for customer growth at low costs
  • Industry-leading modular design platform led by John Hatem
  • Ability to deliver a completed site from shell within 12 – 16 week

See full JDP Capital Management Wide-Moat Investing Presentation: CyrusOne Inc in PDF format here.