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
- 33% upside due to special situation despite recent run up, 60% – 80% upside over 18 months
- Highest quality, least leveraged data center REIT growing earnings 20%+ annually
- Wide moat will protect low-20s unleveraged IRR on stabilized data center portfolio
- Attractive valuation caused by perceived control shareholder sell overhang and limited public float
- 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
Strong macro: Leveraged to Big Data growth
Rapidly increasing value of a company’s data has changed the relevance of IT infrastructure
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
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
