Wide-Moat Investing Presentation: CyrusOne Inc

1
Wide-Moat Investing Presentation: CyrusOne Inc


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

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

This Top Value Hedge Fund Is Killing It This Year So Far

Stone House Capital PartnersStone House Capital Partners returned 4.1% for September, bringing its year-to-date return to 72% net. The S&P 500 is up 14.3% for the first nine months of the year. Q3 2021 hedge fund letters, conferences and more Stone House follows a value-based, long-long term and concentrated investment approach focusing on companies rather than the market Read More

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.

Updated on

No posts to display