CYRUSONE INC.
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
Inc. (the "Company") 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 real estate
assets that protect and ensure the continued operation of information technology
("IT") infrastructure for approximately 1,000 customers in 56 data centers,
including one recovery center, in 16 markets (11 cities in the U.S. ; London,
U.K. ; Frankfurt, Germany ; Amsterdam, The Netherlands ; Dublin , The Republic of
Ireland and Paris, France ).
We continue to monitor the global outbreak of the novel coronavirus (COVID-19)
and to take steps to mitigate the potential risks to us posed by the pandemic.
We provide a critical service to our customers and are considered an essential
business by most governments. While the impact of the pandemic on our business
has not been significant to date, we are unable to predict its future impact on
our business, financial condition, results of operations, cash flows and ability
to pay dividends as well as the market price of our common stock as discussed in
the risk factors set forth in Part I, Item 1A of this Form 10-K.
Pending Acquisition by KKR and GIP
As previously announced, onNovember 14, 2021 , the Company entered into the Merger Agreement with Parent, and Merger Sub, pursuant to which, subject to the terms and conditions of the Merger Agreement, Merger Sub will be merged with and into the Company (also referred to as the Merger), with the Company surviving the Merger as a wholly owned subsidiary of Parent. Parent and Merger Sub were formed solely for the purpose of entering into the Merger Agreement and related agreements and consummating the transactions contemplated thereby, and Parent is controlled by funds affiliated withKohlberg Kravis Roberts & Co. L.P. ("KKR") andGlobal Infrastructure Management, LLC ("GIP"). Subject to the terms and conditions of the Merger Agreement, the outstanding shares of common stock of the Company at the effective time of the Merger will be acquired for$90.50 per share in an all-cash transaction. The Merger Transactions are subject to customary closing conditions, including the receipt of the required regulatory approvals and the satisfaction or waiver of the other conditions to the Merger described in the Merger Agreement. The Merger Transactions are expected to close during the second quarter of 2022, but there can be no assurances regarding whether the Merger Transactions will close as expected, or at all. The Company's stockholders voted to approve the Merger, the Merger Agreement and the other transactions contemplated by the Merger Agreement at a special meeting of stockholders held for that purpose onFebruary 1, 2022 . Additionally, the waiting period applicable to the Merger Transactions under the Hart-Scott-Rodino Antitrust Improvements Act of 1976, as amended, expired onDecember 29, 2021 .
Our Portfolio
Our 56 data centers, including one recovery center, total 8.6 million Gross
Square Feet ("GSF"), of which 83% of the Colocation Square Feet ("CSF") is
leased and has 984 megawatts ("MW") of power capacity. This includes 12
buildings where we lease such facilities comprising approximately 11% of our
total GSF as of December 31, 2021 . Also included in our total GSF, CSF and MW
are pre-stabilized assets (which include data halls that have been in service
for less than 24 months or are less than 85% leased) with approximately 400,090
GSF and 34% of the CSF is leased with capacity of 43 MW of power.
In addition, we continue to invest primarily in global digital gateway markets
and have properties under development comprising approximately 1.4 million GSF
and 149 MW of power capacity. The estimated remaining total costs to develop
these properties is projected to be between $643.0 million and $730.0 million .
The increase over the prior year is primarily due to developments in Chicago ,
Houston and London . The final costs to develop are likely to change depending on
several factors
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including the customer capital improvements required based on the future lease
contracts executed on such properties. We also have 505 acres of land available
for future data center development.
Operational Overview
The following discussion provides an overview of our capital and financing activity, operations and transactions for the year endedDecember 31, 2021 and should be read in conjunction with the full discussion of our operating results, liquidity and capital resources included in this Form 10-K, as well as the risk factors set forth in Part I, Item 1A.
Outlook
We seek to maximize the growth of long-term earnings and shareholder value primarily through increasing cash flow at existing properties and developing high-quality data center assets and campuses at attractive yields with long-term, stable operating income. In 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. Fundamental secular trends for data center real estate have remained strong, including the exponential growth in global data, the growth of e-commerce and demand for outsourcing of data storage and cloud-based applications. Large cloud-based demand, in particular, is strong in theU.S. andEurope . The favorable trends have attracted new capital funding for multiple data center platforms, including both public and private companies, leading to significant increases in supply in most major markets in which we operate. While demand remains robust, the supply outlook has led to pricing pressure, particularly with large hyperscale customers that are driving an increase in demand, which we expect to continue in 2022. In terms of capital investment, we will continue to pursue selective development of new data centers primarily in global digital gateway markets where we project demand and market rental rates will provide attractive financial returns.
We may, from time to time, selectively dispose of non-strategic assets to recycle capital and enhance long-term growth in earnings and cash flows, as well as to improve the overall quality of our portfolio.
Our access to the investment grade debt capital markets is critical to managing our business as a public company and we are committed to maintaining our investment grade ratings and have a strong balance sheet. As a result of the announcement of the pending acquisition of the Company, credit ratings agencies have placedCyrusOne's ratings on negative credit watch due to uncertainty regarding our growth strategy and leverage policy. Please see "Liquidity and Capital Resources" for additional information.
Inflation and Supply Chain Risks
TheU.S. and European economies where we operate experienced significant increases in inflation in 2021, however this inflation did not have a significant impact on our business over this period. We continue to monitor our supply chain costs, as increases in inflation may adversely impact our business. However, the availability of equipment and materials that support the development and construction of our data centers has experienced constraints on supplies resulting in increased lead times and is leading to moderate increases in prices on equipment. Through our supplier networks we have contracted at fixed prices for supply of our future equipment needs, but continued supply chain constraints may over time result in increased costs of our construction projects. In addition, our business may be adversely impacted by inflation as 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. We are unable to predict future inflation that may impact our business. Most of our leases have contractual rent escalations, typically ranging from 1-3% per annum; in addition most of our revenue from colocation contracts is structured to pass-through the cost of sub-metered utilities. In the future, we expect more of our leases to be structured to pass-through utility costs. In addition, approximately 76% of our leases, based on annualized rent, expire within six years and we will be looking to replace existing leases with new leases at then existing market rates.
Summary of Significant Transactions and Activities for the Year Ended
Real Estate Acquisitions, Development and Other Activities
InJanuary 2022 , the Company entered into a definitive agreement for the sale of its fourHouston data center assets. Under the terms of the agreement, the buyer will acquire the Houston West I, II and III and Houston Galleria data centers fromCyrusOne . Additionally, at closingCyrusOne will lease back from the buyer of the Houston West III shell to support a lease signed with a hyperscale customer in the fourth quarter of 2021. Total consideration for the transaction will be approximately$670.0 million , subject to a net working capital adjustment. 55 -------------------------------------------------------------------------------- During the year endedDecember 31, 2021 , the Company purchased approximately 35 acres of land for future development inMadrid, Spain ;Amsterdam, The Netherlands ;San Antonio, Texas andFrankfurt, Germany for a cost totaling$63.8 million . InJune 2021 , the Company entered into lease amendments for the two data center leases located inLondon, United Kingdom to extend the lease terms. Per lease modification accounting rules under ASC 842, these leases were classified as finance leases on the modification effective date. Previously these leases were accounted as operating leases. The finance lease asset and liability are presented in Buildings and improvements and Finance lease liabilities in the Consolidated Balance Sheets, respectively. During the year endedDecember 31, 2020 , the Company purchased land for future development inFrankfurt, Germany andLondon, United Kingdom totaling 35 acres for$58.0 million . InMarch 2020 , the Company entered into a 25-year lease comprising a 45,000 square feet building and commenced development of a 27 MW data center inParis, France which was preleased to a customer. During the year endedDecember 31, 2021 , cash capital expenditures were$727.0 million , of which$702.6 million related to the development and construction of data centers. We continue to make a significant investment to build and develop data centers which will require additional capital investment. The expansion and development of additional power capacity and building square feet during the year endedDecember 31, 2021 primarily related to development in key markets, primarily inNorthern Virginia ,Frankfurt ,Phoenix ,Dublin ,London ,Somerset ,Paris ,San Antonio andChicago .
Capital and Financing Activity
Financing Activity
Credit Facilities
As ofDecember 31, 2021 , we had$800.0 million outstanding under the Amended Credit Agreement (as defined below) and$2.7 billion of senior notes. For more information, see Note 11, Debt. OnMarch 31, 2020 ,CyrusOne LP , aMaryland limited partnership (the "Operating Partnership"), and subsidiary of the Company, entered into an amendment to its credit agreement, dated as ofMarch 29, 2018 (as so amended, the "Amended Credit Agreement"), among theOperating Partnership , as borrower, the lenders party thereto (the "Lenders") andJPMorgan Chase Bank, N.A ., as administrative agent for the Lenders. Proceeds from the Amended Credit Agreement were used, among other things, to refinance and replace the credit facilities under the Company's prior credit agreement. The Amended Credit Agreement provides for (i) a$1.4 billion senior unsecured multi-currency revolving credit facility (the "Revolving Credit Facility"), (ii) senior unsecured term loans due 2023 in a dollar equivalent principal amount of$400.0 million (the "2023 Term Loan Facility"), and (iii) senior unsecured term loans due 2025 in a principal amount of$700.0 million (the "2025 Term Loan Facility"). The Amended Credit Agreement also includes an accordion feature pursuant to which theOperating Partnership is permitted to obtain additional revolving or term loan commitments so long as the aggregate principal amount of commitments and/or term loans under the Amended Credit Agreement does not exceed$4.0 billion . The Revolving Credit Facility provides for borrowings inU.S. Dollars, Euros, Pounds Sterling, Canadian Dollars, Australian Dollars, Japanese Yen, Hong Kong Dollars, Singapore Dollars and Swiss Francs (subject to a sublimit of$750.0 million on borrowings in currencies other thanU.S. Dollars). The Revolving Credit Facility matures onMarch 29, 2024 with one 12-month extension option. The 2023 Term Loan Facility matures onMarch 29, 2023 with two 1-year extension options, and the 2025 Term Loan Facility matures onMarch 28, 2025 . Senior Debt
On
On
On
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During the fourth quarter of 2018, the Company entered 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$750.0 million (the "2018 ATM Stock Offering Program"). During the second quarter of 2020, the Company entered 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$750.0 million (the "2020 ATM Stock Offering Program"). The 2020 ATM Stock Offering Program replaced the 2018 ATM Stock Offering Program. During the second quarter of 2021, the Company entered 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$750.0 million (the "2021 ATM Stock Offering Program"). The 2021 ATM Stock Offering Program replaced the 2020 ATM Stock Offering Program. InNovember 2019 ,CyrusOne Inc. entered into a forward equity sale agreement with a financial institution acting as forward purchaser under the 2018 ATM Stock Offering Program with respect to 1.6 million shares of its common stock at an initial forward price of$61.67 per share. The Company fully physically settled this forward equity sale agreement inJune 2020 . Upon settlement, the Company issued all such shares to such financial institution in its capacity as forward purchaser, in exchange for proceeds of approximately$96.5 million , in accordance with the provisions of the forward equity sale agreement. During the year endedDecember 31, 2020 ,CyrusOne Inc. entered into forward equity sale agreements with financial institutions acting as forward purchasers under the 2018 ATM Stock Offering Program and the 2020 ATM Stock Offering Program, as applicable, with respect to approximately 10.2 million shares of its common stock at a weighted average price of$68.98 per share, net of expenses. The Company received proceeds of$219.1 million from the sale of 3.4 million of its common shares by the forward purchasers in respect of forward equity sale agreements entered during the year endedDecember 31, 2020 . During the year endedDecember 31, 2021 ,CyrusOne Inc. entered into forward equity sale agreements under the 2021 ATM Stock Offering Program with respect to approximately 3.0 million shares. The Company received proceeds of$116.6 million from the sale of 1.6 million of its common shares by the forward purchasers in respect of forward equity sale agreements entered during the year endedDecember 31, 2021 . The Company currently expects to fully physically settle the remaining forward equity sale agreements byJune 2022 and receive cash proceeds upon one or more settlement dates at the Company's discretion, prior to the final settlement dates under the forward equity sale agreements, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward equity sale agreements multiplied by the relevant forward price per share. The weighted average forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the terms of the agreements.
As of
Concentration of Revenue
We have significant concentration of revenue with few customers. 20 customers represented approximately 64.9% of our annualized rent as ofDecember 31, 2021 . One customer represented 20% of our annualized rent as ofDecember 31, 2021 , and 19% of our revenue for the year endedDecember 31, 2021 . Please see "Our Portfolio" set forth in Part I, Item 1 of this Form 10-K.
Annualized backlog from leased but not commenced leases
We define our annualized backlog as the twelve-month recurring revenue (calculated in accordance with generally accepted accounting principles inthe United States of America ("GAAP")) for executed lease contracts achieved upon full occupancy which have not commenced as of the end of a period. Our backlog as ofDecember 31, 2021 and 2020 was approximately$176.8 million and$101.0 million , respectively. We expect 80% of our backlog lease contracts to commence in 2022 and 20% in 2023 and thereafter. 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 definition of backlog may differ from other companies in our industry. 57 --------------------------------------------------------------------------------
Critical Accounting 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
Our revenue consists of lease revenue and revenue from contracts with customers.
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 rent receivables is deemed to be unlikely. We
adopted Accounting Standards Codification ("ASC") 842, Leases ("ASC 842"), the
new accounting standard for leases, effective January 1, 2019 using the modified
retrospective approach and prior periods were not restated. In addition, we
adopted Revenue from Contracts with Customers ("ASC 606"), the new accounting
standard for revenue from contracts with customers, effective January 1, 2018
using the modified retrospective approach. See Note 4, Recently Issued
Accounting Standards, Note 5, Revenue Recognition and Note 6, Leases - As a
Lessee, in our audited consolidated financial statements included in this Form
10-K for additional information related to the adoption.
Lease Revenue:
Our leasing revenue primarily consists of colocation rent, metered power reimbursements and interconnection revenue and is accounted for under ASC 842, Leases. We generally are not entitled to reimbursements for rental expenses including real estate taxes, insurance or other common area operating expenses. The accounting for leases is highly dependent on the classification of the lease as an operating or finance lease and requires judgment and estimates in evaluating the principles of the new accounting standard for leases, including whether an arrangement is a lease, the fair value of the identified asset, expected lease term and economic life of the asset.
a.Colocation Rent Revenue
Colocation rent revenues, including interconnection revenue, are fixed minimum lease payments 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 power or space. The excess of revenue recognized over amounts contractually due is recognized as a straight-line receivable, which is included in Rent and other receivables in our Consolidated Balance Sheets. Some of our leases are structured on a gross basis in which the customer pays a fixed amount for colocation space and power. The revenue for these types of leases is recorded in colocation rent revenue.
b. Metered Power Reimbursements Revenue
Some of our leases provide that the customer is separately billed for power
based upon actual or estimated metered usage generally at rates then in effect.
Metered power reimbursement revenue is variable lease payments 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 revenue.
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Revenue from Contracts with Customers
Revenue from our managed services, equipment sales, installations and other services are recognized under ASC 606.
Equipment sold by us generally consists of servers, switches, networking equipment, cable infrastructure and cabinets. Revenue is recognized at a point-in-time when control of the equipment transfers to the customer from the Company, which generally occurs upon delivery to the customer.
Managed services include providing 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.
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. 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. Other service revenue is measured based on the consideration specified in the contract and recognized over time as we satisfy the performance obligation.
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. The accounting for capitalization of costs requires judgment and estimates to evaluate each project, including the timing and activities necessary to prepare an asset for its intended use, evaluation of direct and indirect project costs, and the allocation of costs to specific projects. Costs considered for capitalization include, but are not limited to, construction costs, interest, real estate taxes, insurance and utilities, 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 incremental initial direct costs incurred for successful origination of new leases which include internal and external leasing commissions. 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.
Costs incurred for maintaining and repairing our properties, which do not extend their useful lives, are expensed as incurred.
Impairment Losses
Management reviews the carrying value of long-lived assets, including intangible assets with finite lives, when events or circumstances indicate that the carrying value 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 proceeds from its eventual disposition and compare such amount to its carrying value. To determine the cash flows we consider factors such as future operating income, trends and prospects, as well as the effects of 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 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 evaluation whether assets may not be recoverable and the estimates and assumptions used to determine undiscounted cash flows and fair value requires significant judgment by management. We recognized an impairment loss of$0.5 million for equipment held for use in inventory based on the book value of the abandoned equipment for the year endedDecember 31, 2021 . For the year endedDecember 31, 2020 , we recognized an impairment loss of$11.2 million , which included an$8.8 million impairment loss based on our estimate of the decrease in the fair value of the equipment held for use in inventory at ourU.S. data centers and a$2.4 million impairment loss based on the estimated fair value for our investment in land held inAtlanta for future 59 -------------------------------------------------------------------------------- development as the Company sold this land to a third-party inFebruary 2021 . For the year endedDecember 31, 2019 , we recognized an impairment loss of$0.7 million , primarily due to an impairment loss on theSouth Bend -Monroe facility, which was being actively marketed for sale. These fair values were based on unobservable inputs and the determination of fair value of real estate assets to be held for use is derived using the discounted cash flow method and involves a number of management assumptions relating to future economic events that could materially affect the determination of the ultimate fair value. Such assumptions are Level 3 inputs and include, but are not limited to, projected vacancy rates, rental rates, property operating expenses and required capital expenditures. These factors require management's judgment of factors such as market knowledge, historical experience, lease terms, tenant financial strength, economy, demographics, environment, property location, age, physical condition and expected return requirements, among other things. The aforementioned factors are taken as a whole by management in the determination of fair value. See Fair Value Measurements below for further information on fair value. The impairment losses are included in Impairment losses and (gain) loss on asset disposals, net in our Consolidated Statements 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 ofDecember 31, 2021 , 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 ofDecember 2021 , customer reimbursements were$268.8 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 in-place lease revenue. Colocation Square Feet ("CSF"). We calculate leased total CSF as the GSF at an operating facility that is 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 leased total CSF by total CSF. Percent occupied differs from Percent leased. Percent occupied is determined based on occupied CSF billed to customers under signed leases divided by total CSF. CSF associated with signed leases that have not commenced are not included. Recurring Rent Churn Percentage. We calculate recurring rent churn percentage 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 capital expenditures. Management views its capital expenditures as comprised of acquisitions of real estate, development of real estate, recurring capital expenditures and all other non-real estate capital expenditures. Purchases of land or buildings from third parties represent acquisitions of real estate. Capital spending that expands or improves our data centers is deemed development of real estate. Replacements of data center equipment are considered recurring capital expenditures. Purchases of software, computer equipment and furniture and fixtures are included in non-real estate capital expenditures.
Factors That May Influence Future Results of Operations
Rental Income. Our revenue growth depends 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 ofDecember 31, 2021 , we have leased approximately 83% of our CSF. Our ability to grow revenue with our existing customers will also be affected by our ability to maintain or increase rental rates at our properties. Rates contracted with our customers that renewed in 2021 were lower than the rates previously in effect, a trend that we expect to continue and to be driven by increases in data center supply and cloud company offerings. As such, we anticipate decreases in rates as contracts renew which could continue to 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 ofDecember 31, 2021 , 19% of our leased GSF was to customers on a gross basis. Under a gross lease, 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 ofDecember 31, 2021 , 81% of our leased GSF was to customers with separately billed metered power. Under the metered power model, the customer pays us a fixed monthly rent amount, plus its actual costs of sub-metered electricity 60 -------------------------------------------------------------------------------- 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 gross lease above. Fluctuations in a customer's utilization of power and the supplier pricing of power do not impact our profitability as much 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 endedDecember 31, 2021 , we increased our operational GSF by 8%, bringing our total GSF to approximately 8.6 million atDecember 31, 2021 . Our portfolio, as ofDecember 31, 2021 , also included approximately 1.4 million GSF under development, as well as 1.7 million GSF of additional powered shell space under roof available for development. In addition, we have approximately 505 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 ofDecember 31, 2021 , was approximately 1.6 million GSF. Excluding month-to-month leases, leases representing 11% and 14% of our total GSF are scheduled to expire in 2022 and 2023, respectively. These leases represented approximately 15% and 16% of our total annualized rent as ofDecember 31, 2021 . Month-to-month leases represented 7% of our total annualized rent as ofDecember 31, 2021 . Recurring rent churn was 3.5% for the year endedDecember 31, 2021 , as compared to 3.6% for the year endedDecember 31, 2020 . Our recurring rent churn for each quarter in 2021 ranged from 0.3% to 1.8%, in comparison to a range of 0.6% to 1.1% in 2020. Conditions in Significant Markets. Our properties are located in 16 distinct markets (11 cities in theU.S. ;London, U.K. ;Frankfurt, Germany ;Amsterdam, The Netherlands ;Dublin , TheRepublic of Ireland andParis, France ).Cincinnati ,Dallas ,Houston ,New York Metro,Northern Virginia ,Phoenix andSan Antonio accounted for approximately 73% of our annualized rent as ofDecember 31, 2021 . We have recently expanded into development inAmsterdam, The Netherlands ,Dublin , theRepublic of Ireland andParis, France . General economic conditions and regulations in these markets could impact our overall profitability. 61 --------------------------------------------------------------------------------
Results of Operations
Comparison of Years Ended
IN MILLIONS, except per share data
$ Change % Change
For the Year Ended December 31, 2021 2020 2021 vs. 2020 2021 vs. 2020
Revenue:
Colocation rent $ 924.1 $ 842.1 $ 82.0 9.7 %
Metered power reimbursements 259.0 161.4 97.6 60.5 %
Equipment sales 4.2 10.6 (6.4) (60.4) %
Other revenue 18.4 19.4 (1.0) (5.2) %
Total revenue 1,205.7 1,033.5 172.2 16.7 %
Operating expenses:
Property operating expenses 531.1 411.6 119.5 29.0 %
Sales and marketing 14.9 18.3 (3.4) (18.6) %
General and administrative 101.9 99.3 2.6 2.6 %
Depreciation and amortization 499.2 449.4 49.8 11.1 %
Transaction, acquisition, integration and
other related expenses 21.3 3.7 17.6 n/m
Impairment losses and (gain) loss on asset
disposals, net (2.0) 11.1 (13.1) n/m
Total operating expenses 1,166.4 993.4 173.0 17.4 %
Operating income 39.3 40.1 (0.8) (2.0) %
Interest expense, net (64.6) (57.7) (6.9) 12.0 %
Gain on marketable equity investment 2.4 89.5 (87.1) (97.3) %
Loss on early extinguishment of debt - (6.5) 6.5 n/m
Foreign currency and derivative gains
(losses), net 43.6 (27.6) 71.2 n/m
Other expense (0.3) - (0.3) n/m
Net income before income taxes 20.4 37.8 (17.4) (46.0) %
Income tax benefit 4.9 3.6 1.3 36.1
Net income $ 25.3 $ 41.4 $ (16.1) (38.9) %
Operating gross margin 3.3 % 3.9 %
Capital expenditures *:
Investment in real estate $ 702.6 $ 896.7 $ (194.1) (21.6) %
Recurring capital expenditures 24.4 13.8 10.6 76.8 %
Total $ 727.0 $ 910.5 $ (183.5) (20.2) %
Metrics information:
CSF* 5,094,283 4,665,000 429,283 9.2 %
Leased rate* 83 % 84 %
Income per share - basic and diluted
$ 2.06 $ 2.02
* See "Key Operating Metrics" above for a definition of capital expenditures, CSF and
leased rate.
62
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Operations
As ofDecember 31, 2021 , we had approximately 1,000 customers, many of which have leases at multiple locations. Our recurring revenues consist of rental revenue for colocation space and metered power reimbursements based upon customers with leases, and our nonrecurring revenues consist of equipment sales and installation services based on contracts with customers. We provide customers with data center services pursuant to leases with initial terms ranging from three to ten years. As ofDecember 31, 2021 , the weighted average remaining term was 3.8 years based upon annualized rent. Lease expirations through 2024, excluding month-to-month leases, represent 34% of our total GSF, or 46% of our aggregate annualized rent as ofDecember 31, 2021 . At the end of the lease term, customers may allow the contract to expire, 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 ofDecember 31, 2021 , 5% of our GSF was subject to month-to-month leases.
Revenue
For the year endedDecember 31, 2021 , revenue was$1,205.7 million , an increase of$172.2 million , or 16.7% compared to$1,033.5 million for the year endedDecember 31, 2020 . Revenue increased$8.2 million for the year endedDecember 31, 2021 compared to the same period in 2020 due to favorable currency translation. 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. Recurring rent churn percentage of 3.5% for the year endedDecember 31, 2021 decreased by 0.1% as compared to the 3.6% for the year endedDecember 31, 2020 . The revenue increase of$172.2 million for the year endedDecember 31, 2021 , as compared to the year endedDecember 31, 2020 is primarily due to the following: •$97.6 million increase in metered power reimbursements primarily due to a$27.8 million of additional reimbursements from Winter Storm Uri inTexas and$69.8 million due to new leasing and higher usage; •$81.2 million increase in colocation rent, primarily due to a$119.9 million increase for new leasing at completed developments atU.S. and European properties, partially offset by$38.7 million of rent churn related to expired leases; and •$3.6 million increase in interconnection revenue; partially offset by •$7.4 million decrease in equipment sales and associated installation services with two significant customers during the year endedDecember 31, 2020 ; and •$2.8 million of lower termination fees and Other revenue.
Operating Expenses
Property operating expenses
For the year endedDecember 31, 2021 , Property operating expenses were$531.1 million , an increase of$119.5 million , or 29.0%, compared to$411.6 million for the year endedDecember 31, 2020 primarily due to the following: •$126.0 million increase in property operating expenses primarily due to: •$104.6 million increase in electricity due to$31.9 million increase from Winter Storm Uri inTexas and$72.7 million increase related to expansion at existing properties and newly developed properties placed in service in theU.S. andEurope ; and •$21.4 million increase in property operating expenses primarily due to increases in repair and maintenance, contract services, personnel costs, property taxes, rent and other expenses related to expansion at existing properties and newly developed properties placed in service in theU.S. andEurope ; partially offset by •$6.5 million decrease in equipment cost of sales due to lower equipment sales volume associated with two significant customers during the year endedDecember 31, 2020 .
Sales and marketing expenses
For the year endedDecember 31, 2021 , Sales and marketing expenses were$14.9 million , a decrease of$3.4 million , or 18.6%, compared to$18.3 million for the year endedDecember 31, 2020 , primarily due to lower severance and personnel costs as a result of changes in the organizational structure, decline in events and travel expenses as company travel has been restricted sinceMarch 2020 as a result of the pandemic and lower advertising. 63 --------------------------------------------------------------------------------
General and administrative expenses
For the year endedDecember 31, 2021 , General and administrative expenses were$101.9 million , an increase of$2.6 million , or 2.6%, compared to$99.3 million for the year endedDecember 31, 2020 , primarily due to the following: •$5.8 million increase related to losses inFrankfurt ,London andParis for settlements with subcontractors associated with the insolvency of a general contractor; •$2.8 million increase in personnel costs primarily related to stock compensation, insurance and other employee benefits; •$1.4 million increase in rent and facilities costs; and •$1.0 million increase in other general and administrative expenses; partially offset by •$6.3 million decrease in compensation expense for severance paid to six members of the senior management team including our former Chief Executive Officer (CEO) during 2020, compared the severance paid in connection with the separation of our then CEO inJuly 2021 ; •$2.0 million decrease in consulting and legal, primarily related to tax fees related to European restructuring; and •$0.1 million decrease in legal fees primarily due to the receipt of$4.9 million in proceeds from the resolution of certain litigation, partially offset by increased costs related to customer negotiations and legal and tax planning.
Depreciation and amortization expense
For the year endedDecember 31, 2021 , Depreciation and amortization expense was$499.2 million , an increase of$49.8 million , or 11.1%, compared to$449.4 million for the year endedDecember 31, 2020 . This increase was primarily driven by asset additions that were placed in service after the fourth quarter of 2020. SinceDecember 31, 2020 , approximately$987.4 million of new data center assets have been placed in service. Depreciation and amortization expense is expected to increase in future periods as we complete the development of properties and installation of equipment and facilities to support our operations.
Transaction, acquisition, integration and other related expenses
For the year endedDecember 31, 2021 , Transaction, acquisition, integration and other related expenses were$21.3 million , an increase of$17.6 million , compared to$3.7 million for the year endedDecember 31, 2020 . This increase was primarily driven by expenses related to the pending acquisition of the Company by KKR and GIP.
Impairment losses and (gain) loss on asset disposals, net
For the year endedDecember 31, 2021 , Impairment losses and (gain) loss on asset disposals, net were a gain of$2.0 million primarily due to the gain on sale of certain Texas Fiber connectivity assets. For the year endedDecember 31, 2020 , Impairment losses and (gain) loss on asset disposals, net were$11.1 million as the result of our planned disposition of land held for future development inAtlanta, GA to a third-party and impairment related to equipment held for use in inventory at ourU.S. data centers.
Non-Operating Income and Expenses
Interest expense, net
For the year endedDecember 31, 2021 , Interest expense, net was$64.6 million , an increase of$6.9 million , or 12.0%, as compared to$57.7 million for the year endedDecember 31, 2020 , primarily due to the following: •$4.0 million increase related to the increase in cash settlements on cross currency and interest rate swaps; •$2.6 million increase due to lower capitalized interest as a result of the Company's lower overall average interest rate; and •$1.9 million increase interest expense related to finance leases; partially offset by •$1.2 million decrease due to the repayment of a portion of the Amended Credit Agreement which decreased interest expense by$13.8 million , partially offset by a$332.2 million increase in average debt outstanding which increased interest expense by$12.6 million ; and •$0.4 million decrease related to an increase in interest income primarily due to interest on a sales tax refund. We anticipate drawing on our Revolving Credit Facility to fund, in part, our capital requirements for investments in data centers and potential land acquisitions. Accordingly, we anticipate our interest expense to increase in future periods. 64
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Gain on marketable equity investment
For the year endedDecember 31, 2021 , the Gain on our marketable equity investment in GDS Holdings Limited ("GDS") was$2.4 million , a decrease of$87.1 million , as compared to a gain of$89.5 million for the year endedDecember 31, 2020 . The decrease was primarily the result of our disposition of our remaining investment in GDS inJanuary 2021 . See Note 8, Equity Investments, for information related to our accounting for our equity investment in GDS.
Loss on early extinguishment of debt
For the year endedDecember 31, 2020 , Loss on early extinguishment of debt was$6.5 million , primarily due to repayment of borrowings under a prior$3.0 billion credit facility and the repayment of$300.0 million of the 2023 Term Loan under the Amended Credit Agreement.
Foreign currency and derivative gains (losses), net
For the year endedDecember 31, 2021 , Foreign currency and derivative gains (losses), net were a$43.6 million gain as a result of the translation adjustment on our undesignated EURO denominated borrowings. For the year endedDecember 31, 2020 , Foreign currency and derivative gains (losses), net were a loss of$27.6 million which was a result of a$32.1 million loss associated with the translation adjustment on undesignated Euro denominated borrowings in excess of our net investment, partially offset by a$4.5 million gain on cross-currency swaps from the settlement of certain undesignated Euro/USD cross-currency swaps.
Income tax benefit
For the years ended
Year Ended
For a discussion comparing the Company's financial condition and results of
operations for the year ended
65
--------------------------------------------------------------------------------Significant Balance Sheet Fluctuations
The table below relates to significant fluctuations in certain line items of our
Consolidated Balance Sheets from
December 31, 2021 December 31, 2020 Difference
Total investment in real estate, net $ 5,577.9 $ 5,265.5 $ 312.4
Equity investments 30.3 67.1 (36.8)
Revolving Credit Facility - 432.9 (432.9)
Senior Notes 2,734.4 2,213.2 521.2
Additional paid in capital 4,145.1 3,537.3 607.8
The increase in Total investment in real estate, net was primarily due to the
development of data centers in Northern Virginia , Frankfurt , Phoenix , Dublin ,
London , Somerset , Paris , San Antonio and Chicago . In addition, there were land
purchases for future development made in Madrid, Spain ; Amsterdam, The
Netherlands ; San Antonio, Texas and Frankfurt, Germany .
The decrease in Equity investments was due to the disposition of our investment
in GDS in
The decrease in borrowing under the Revolving Credit Facility was primarily due to the proceeds from the 2028 Notes and proceeds from the settlement of the forward equity sales agreement being used to pay down our Revolving Credit Facility.
The increase in the Senior Notes was primarily due to the 2028 Notes offering. For more information, see Note 11, Debt.
The increase in Additional paid in capital was primarily due to proceeds from the settlement of forward sales of the Company's common stock pursuant to the 2021 ATM Stock Offering Program and the prior program.
Investing Activities
For the year endedDecember 31, 2021 , our capital expenditures were$727.0 million , and substantially all of our investing activity related to our development activities. Our capital expenditures for the year endedDecember 31, 2021 primarily related to the acquisition of land for future development and continued development in key markets, primarily inNorthern Virginia ,Frankfurt ,Phoenix ,Dublin ,London ,Somerset ,Paris ,San Antonio andChicago and deposits for fixed price equipment purchases. During the year endedDecember 31, 2021 , the Company made deposits of$193.4 million for fixed price equipment purchase contracts with various vendors to secure equipment and inventory with the goal of mitigating supply chain disruptions and price increases. For the year endedDecember 31, 2020 , our capital expenditures of$910.5 million primarily related to the continued development in key markets, primarily inDublin ,Iowa ,Frankfurt ,London , theNew York Metro area,Northern Virginia ,Phoenix ,San Antonio , Santa Clara andDallas . In addition, included in capital expenditures are land purchases of$58.0 million inFrankfurt andLondon for future development. For the year endedDecember 31, 2019 , capital expenditures were$876.4 million primarily related to the acquisition of land for future development and continued development in key markets, primarily inAmsterdam ,Austin ,Dallas ,Frankfurt ,London ,Northern Virginia ,Phoenix and Raleigh-Durham. Included in capital expenditures are land purchases of$54.7 million in Santa Clara,San Antonio ,Dublin andCouncil Bluffs for future development. We also made a capital contribution of approximately$3.8 million to our investment inODATA Brasil S.A. and ODATA Colombia S.A.S (collectively "ODATA").
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 our performance. These non-GAAP financial measures should not be construed as being more important than, or a substitute for, comparable GAAP financial measures. In compliance withSEC requirements, our non-GAAP financial measures presented herein are reconciled to net income, the most directly comparable GAAP financial measure. Neither theSEC nor any regulatory body has passed judgment on these non-GAAP measurements. 66
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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 computed in accordance with GAAP before Real
estate depreciation and amortization and Impairment losses and (gain) loss on
asset disposals, net. 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 adjusted for Loss on early extinguishment of
debt; Gain on marketable equity investment; Foreign currency and derivative
(gains) losses, net; New accounting standards and regulatory compliance and the
related system implementation costs; Amortization of tradenames; Transaction,
acquisition, integration and other related expenses; Cash severance and
management transition costs; Severance-related stock compensation costs; and
Legal claim (gain) costs. We believe our 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 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 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 pay dividends or 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
67
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The following table reflects the reconciliation of GAAP net income to FFO and
Normalized FFO for the years ended December 31, 2021 , 2020 and 2019 (amounts in
millions):
Year Ended
December 31,
2021 2020 2019
Net income $ 25.3 $ 41.4 $ 41.4
Real estate depreciation and amortization 491.0 440.1 408.5
Impairment losses and (gain) loss on asset disposals, net (2.0) 11.1 1.1
Funds from Operations ("FFO") - NAREIT defined $ 514.3 $ 492.6 $ 451.0
Loss on early extinguishment of debt - 6.5 71.8
Gain on marketable equity investment (2.4) (89.5) (132.3)
Foreign currency and derivative (gains) losses, net (43.6) 27.6 7.5 New accounting standards and regulatory compliance and the related system implementation costs
- - 0.8
Amortization of tradenames 0.9 1.2 1.3
Transaction, acquisition, integration and other related expenses 21.3 3.7 8.4
Cash severance and management transition costs 4.3 14.1 (0.6)
Severance-related stock compensation costs 4.5 2.9 -
Legal claim (gain) costs (4.9) 0.3 1.1
Normalized Funds from Operations ("Normalized FFO") $ 494.4 $ 459.4 $ 409.0
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 Net income, adjusted for Sales and marketing expenses,
General and administrative expenses, Depreciation and amortization expenses,
Transaction, acquisition, integration and other related expenses, Interest
expense, net, Gain on marketable equity investment, Loss on early extinguishment
of debt, Impairment losses and (gain) loss on asset disposals, net, Foreign
currency and derivative (gains) losses, net, Other expense and Income tax
benefit. 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 Net income 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 pay dividends and 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.
68
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The following table reflects the reconciliation of Net Income to NOI for the
years ended
Year Ended
December 31,
2021 2020 2019
Net income $ 25.3 $ 41.4 $ 41.4
Sales and marketing expenses 14.9 18.3 20.2
General and administrative expenses 101.9 99.3 83.5
Depreciation and amortization expenses 499.2 449.4 417.7
Transaction, acquisition, integration and other related expenses 21.3 3.7 8.4
Interest expense, net 64.6 57.7 82.0
Gain on marketable equity investment (2.4) (89.5) (132.3)
Loss on early extinguishment of debt - 6.5 71.8
Impairment losses and (gain) loss on asset disposals, net (2.0) 11.1 1.1
Foreign currency and derivative (gains) losses, net (43.6) 27.6 7.5
Other expense 0.3 - 0.3
Income tax benefit (4.9) (3.6) (3.7)
Net Operating Income $ 674.6 $ 621.9 $ 597.9 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. Pursuant to the Merger Agreement, we have agreed to various specific restrictions relating to the conduct of our business between the date of the Merger Agreement and the time at which the Merger becomes effective, including but not limited to, agreeing to not to (i) issue or sell shares of our capital stock, partnership interests or other equity or voting interests, (ii) issue or sell any debt securities or warrants or other rights to acquire any debt securities of us and our wholly owned subsidiaries and (iii) incur or assume any indebtedness, in each case subject to the terms of the Merger Agreements and any exceptions set forth therein. Short-term Liquidity The effects of the COVID-19 pandemic continue to evolve rapidly. While the impact of COVID-19 on certain operating and administrative costs for the year endedDecember 31, 2021 was not significant, we have incurred additional general and administrative and maintenance costs to operate our data centers and offices. We expect these costs will continue in the future, however, the extent to which these costs continue or increase will depend on factors that are uncertain and unpredictable at this time, including federal, state, and local regulations as well as the duration and severity of the pandemic. While the pandemic may impact our cash flows from customers, the extent and duration of that impact is also uncertain and unpredictable at this time. For the year endedDecember 31, 2021 , the impact of the pandemic on rent concessions and collections of rent was not significant. As previously discussed, metered power reimbursements increased$97.6 million for the year endedDecember 31, 2021 , as compared to the corresponding period in 2020, primarily due to a$27.8 million increase from Winter Storm Uri inTexas . As ofDecember 31, 2021 , we collected 99% of power billings associated with Winter Storm Uri. 69 -------------------------------------------------------------------------------- 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, availability under our Revolving Credit Facility and settlement of the ATM forward equity sale agreements. For the year endedDecember 31, 2021 , our cash provided by operating activities was$477.6 million which was$223.7 million more than dividends paid during the year endedDecember 31, 2021 of$253.9 million . We have contractual interest obligations which include interest payments on the 2024 Notes, 2027 Notes, 2028 Notes, 2029 Notes, 2030 Notes (each as defined in Note 11, Debt), the Amended Credit Agreement, finance lease liabilities and operating lease liabilities. Assuming no early payment of debt in future years, our current interest obligations are as follows: IN MILLIONS Total < 1 Year 1-3 Years 3-5 years Thereafter Interest payments on senior notes, credit agreement, finance lease liabilities and operating lease liabilities(1)$ 540.4 $ 85.4 $
162.4
1.Includes contractual interest payments on the 2024 Notes, 2027 Notes, 2028 Notes, 2029 Notes, 2030 Notes, the Amended Credit Agreement, finance lease liabilities and operating lease liabilities assuming no early payment of debt in future periods and the exercise of the one-year extension option on the Revolving Credit Facility. Our contractual interest obligations were$662.7 million atDecember 31, 2020 . See Note 6, Leased - As a Lessee, for further discussion of our finance lease liabilities and operating lease liabilities. Available capacity under the Amended Credit Agreement as ofDecember 31, 2021 was$1,391.6 million related to the Revolving Credit Facility. Total liquidity as ofDecember 31, 2021 was approximately$1,851.2 million , which included the$1,391.6 million available under the Revolving Credit Facility, cash and cash equivalents of$346.3 million and the pro forma impact of the settlement of the forward sale agreements of$113.3 million . AtDecember 31, 2021 , we had no borrowings under the Revolving Credit Facility. We had borrowings of$432.9 million and$615.0 million under the Revolving Credit Facility, respectively, atDecember 31, 2020 and 2019 under the$1.7 Billion Revolving Credit Facility. InMay 2021 , CyrusOne Europe Finance DAC closed its offering of €500.0 million aggregate principal amount of 1.125% senior notes dueMay 2028 . InSeptember 2020 ,CyrusOne LP andCyrusOne Finance Corp. closed their offering of$400.0 million aggregate principal amount of 2.150% senior notes dueNovember 2030 . InJanuary 2020 ,CyrusOne LP andCyrusOne Finance Corp. closed their offering of €500.0 million aggregate principal amount of 1.450% senior notes dueJanuary 2027 . During the year endedDecember 31, 2021 ,CyrusOne Inc. entered into forward equity sale agreements under its ATM stock offering program with respect to approximately 3.0 million shares. The Company received proceeds of$116.6 million from the sale of 1.6 million of its common shares by the forward purchasers in respect of forward equity sale agreements entered during the year endedDecember 31, 2021 . During the year endedDecember 31, 2020 ,CyrusOne Inc. entered into forward equity sale agreements with financial institutions acting as forward purchasers under a prior ATM stock offering program and the 2020 ATM Stock Offering Program, as applicable, with respect to approximately 10.2 million shares of its common stock at a weighted average price of$68.98 per share, net of expenses. The Company received proceeds of$219.1 million from the sale of 3.4 million of its common shares by the forward purchasers in respect of forward equity sale agreements entered during the year endedDecember 31, 2020 The Company currently expects to fully physically settle the remaining forward equity sale agreements byJune 2022 and receive cash proceeds upon one or more settlement dates at the Company's discretion, prior to the final settlement dates under the forward equity sale agreements, in which case we expect to receive aggregate net cash proceeds at settlement equal to the number of shares specified in such forward equity sale agreements multiplied by the relevant forward price per share. The weighted average forward sale price that we expect to receive upon physical settlement of the agreements will be subject to adjustment for (i) a floating interest rate factor equal to a specified daily rate less a spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled dividends during the terms of the agreements. 70
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The following table represents a summary of forward sale of equity of our common
stock for the year ended
Remaining Proceeds
Offering Program Forward Shares
Sold/(Settled) Net Proceeds Received Available(1)
Total at
6.8 $ - $ 484.7
Forward adjustments - - (7.6)
May 2020 Forward Offering settlement (1.4) 95.3 (95.3)
May 2020 Forward Offering settlement (1.3) 95.5 (95.5)
May 2021 Forward Offering - Sales 0.3 22.5
June 2021 Forward Offering - Sales 1.6 116.6
June 2021 Forward Offering - Sales 1.1 90.8
September 2020 Forward Offering settlement (1.4) 100.5 (100.5)
September 2020 Forward Offering settlement (1.6) 112.5 (112.5)
November 2020 Forward Offering settlement (1.1) 73.3 (73.3)
June 2021 Forward Offering settlement (1.6) 116.6 (116.6)
Total as of December 31, 2021 1.4 $ 593.7 $ 113.3
(1) As of December 31, 2021 , the total estimated proceeds, net of adjustments
for (i) a floating interest rate factor equal to a specified daily rate less a
spread, (ii) the forward purchasers' stock borrowing costs and (iii) scheduled
dividends adjustments is $113.3 million subject to further adjustment when the
forward offerings are settled as described above.
Our total common stock issuance for the year ended December 31, 2021 was
$597.7 million primarily related to proceeds from forward equity settlement,
shares vesting and options exercised. As of December 31, 2021 , there was $513.4
million under the 2021 ATM Stock Offering Program available for future
offerings.
During the year ended
As of
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 endedDecember 31, 2021 , our cash capital expenditures were$727.0 million . Our capital expenditures are primarily discretionary, excluding leases under contract, to expand our existing data center properties, acquire or construct new facilities. We intend to continue to develop and expand properties, where we believe there is sufficient demand or have contracted to lease, and are prepared to commit additional resources to support this growth. We expect to meet our long-term liquidity requirements, including development and potential acquisitions, from cash and cash equivalents, cash flows from our operations, issuances of debt and equity securities, and borrowings under our Revolving Credit Facility. While we regularly monitor inflation, commodity and labor pricing trends related to our data center development capital expenditures, a large proportion of our current development project costs are under firm price commitments. Accordingly, while we have experienced price increases in certain selective materials due to recent inflation, international trade negotiations and actions, we currently do not anticipate any material adverse effect on our overall development costs. As ofDecember 31, 2021 , all of our outstanding debt matures fromMarch 2023 toNovember 2030 , with a weighted average of 5.4 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 86% fixed and 14% floating. As a result of the announcement of the pending acquisition of the Company, credit ratings agencies have placedCyrusOne's ratings on negative credit watch due to uncertainty regarding our growth strategy and leverage policy. In addition to the sources of capital described herein, we have access to other potential sources of capital including mortgage financing and proceeds from property dispositions as well as proceeds from contributions and partial sale of properties into joint ventures. 71 --------------------------------------------------------------------------------
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 electricity 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 or the spot market prices 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 ofDecember 31, 2021 , our aggregate commitments under these contracts is approximately$353.3 million .
Material Terms of Our Indebtedness
See Note 11, Debt, for the material terms of our indebtedness under the Amended
Credit Agreement and our 2024 Notes, 2027 Notes, 2028 Notes, 2029 Notes and 2030
Notes.
72
--------------------------------------------------------------------------------Cash Flows
Our primary sources of cash during 2021 were earnings from our operations, net proceeds from our Amended Credit Agreement, and net proceeds from the issuances of common stock and 2028 Notes. Our primary uses of cash during 2021 were capital expenditures for the development of real estate, funding our operations and payment of dividends.
The following table summarizes our cash flows for the years ended
IN MILLIONS
For the year ended December 31, 2021 2020 2019
Cash provided by operating activities $ 477.6 $ 456.3 $ 365.7
Cash used in investing activities (875.6) (772.4) (679.9)
Cash provided by financing activities 487.9 507.2 324.8
Comparison of Years Ended
Net cash provided by operating activities for the year endedDecember 31, 2021 increased$21.3 million to$477.6 million compared to$456.3 million for the year endedDecember 31, 2020 due to the following: •Increases in net cash provided by operating activities of$66.2 million primarily due to the following: •$52.7 million increase due to an approximately$172.2 million increase in revenue offset in part by a$119.5 million increase in property operating expenses; and •$13.5 million decrease in severance and bonus payments; partially offset by •Decreases in net cash used in operating activities of$44.9 million primarily due to the following: •$27.5 million decrease in other cash inflows over the corresponding prior year period; •$11.2 million decrease primarily due to an increase in interest payments due to interest on the 2027 Notes; and •$6.2 million decrease due to changes in other operating assets and liabilities. Net cash used in investing activities for the year endedDecember 31, 2021 was$875.6 million compared to$772.4 million for the year endedDecember 31, 2020 . The increase in cash used in investing activities for the year endedDecember 31, 2021 of$103.2 million compared to the year endedDecember 31, 2020 is primarily due to increased investments in real estate and deposits for fixed price equipment purchase contracts in 2021 compared to 2020, partially offset by lower proceeds from the sale of our GDS ADSs.
Investments in real estate
For the year endedDecember 31, 2021 , our capital expenditures of$727.0 million primarily related to the acquisition of land for future development and continued development in key markets, primarily inNorthern Virginia ,Frankfurt ,Phoenix ,Dublin ,London ,Somerset ,Paris ,San Antonio andChicago . For the year endedDecember 31, 2020 , our capital expenditures were$910.5 million , as shown on the statement of cash flows. Substantially all of our investing activity is related to our development activities. Our capital expenditures for 2020 primarily related to the acquisition of land for future development and continued development in key markets, primarily inDallas ,Dublin ,Frankfurt ,Iowa ,London , theNew York Metro area,Northern Virginia ,Paris ,Phoenix ,San Antonio and Santa Clara. Included in capital expenditures are land purchases of$58.0 million inFrankfurt, Germany andLondon, United Kingdom for future development.
Deposits for contract obligations
During the year endedDecember 31, 2021 , the Company made deposits of$193.4 million of deposits for fixed price equipment purchase contracts with various vendors to secure equipment and inventory with the goal of mitigating supply chain disruptions and price increases.
Equity Investments
During the year ended
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During the year ended December 31, 2020 , the Company made capital contributions
of approximately $6.5 million to our ODATA investment. These investment outflows
were partially offset by total net proceeds of $144.1 million from the sale of
approximately 1.8 million ADSs from our GDS investment.
Net cash provided by financing activities for the year ended December 31, 2021
decreased $19.3 million to $487.9 million compared to Net cash provided by
financing activities of $507.2 million for the year ended December 31, 2020
primarily due to the following:
•$280.3 million decrease in proceeds due to a decrease of $2,085.5 million in
net proceeds and repayments on our revolving credit facility offset in part by
an increase in proceeds from Senior notes of $1,805.2 million . See Note 11, Debt
for additional information on the 2027 Notes;
•$17.7 million decrease due to the increase in the dividend rate and the number
of common shares outstanding;
•$3.7 million decrease due to an increase in tax payments related to the
exercise of equity awards; and
•$0.9 million decrease due to an increase in payments for finance lease
liabilities; offset in part by
•$272.0 million increase in proceeds from the issuance of common stock. The
Company settled forward equity agreements totaling 8.4 million shares in the
current period and 5.0 million shares issued in the prior year period; and
•$11.3 million increase due to a decrease in deferred financing costs.
Issuer and guarantor subsidiary summarized financial information
The 2024 Notes, the 2027 Notes, the 2029 Notes and the 2030 Notes issued byCyrusOne LP (the "LP Co-Issuer") andCyrusOne 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 byCyrusOne Inc. (the "Parent Guarantor"). The indentures governing the 2024 Notes, 2027 Notes, 2029 Notes and 2030 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. 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 indentures. The covenants contained in the indentures do not restrict the Company's ability to pay dividends or distributions to stockholders. Only the Parent Guarantor guarantees the 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes. The 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes are structurally junior in right of payment to the indebtedness and other liabilities of the Co-Issuers' subsidiaries (the "Non-Guarantors"), and the guarantee is structurally junior in right of payment to the liabilities of any of the Parent Guarantor's subsidiaries (other than the Co-Issuers). These Non-Guarantors are separate and distinct legal entities and have no obligation, contingent or otherwise, to pay any amounts due pursuant to the 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes, or to make any funds available therefor, whether by dividends, loans, distributions or other payments. Any right that the Co-Issuers or Parent Guarantor have to receive any assets of any of the Non-Guarantors upon the bankruptcy, liquidation or reorganization of those Non-Guarantors, and the consequent rights of holders of the 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes to realize proceeds from the sale of any of such Non-Guarantors' assets, will be structurally subordinated to the claims of such Non-Guarantors' creditors, including trade creditors, mortgage holders and holders of preferred equity interests of those Non-Guarantors. Accordingly, in the event of a bankruptcy, liquidation or reorganization or any of the Non-Guarantors, the Non-Guarantors will pay the holders of their debts, holders of preferred equity interests and their trade creditors before distributing any of their assets to us. The Non-Guarantors conduct substantially all of our operations and hold substantially all of our assets. The guarantee obligations of the Parent Guarantor under the 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes will terminate under the customary circumstances of legal defeasance or covenant defeasance, each as described in the applicable indenture, or if the Co-Issuers' obligations under the applicable indenture are discharged. The guarantee obligations of the Parent Guarantor under the 2024 Notes, 2027 Notes, 2029 Notes and 2030 Notes are subject to certain limitations necessary to prevent the guarantee from constituting a fraudulent conveyance under applicable laws. Under these laws, the guarantee could be voided, or claims in respect of the guarantee could be subordinated to certain obligations of the Parent Guarantor if, among other things, the Parent Guarantor, at the time it entered into the guarantee, received less than reasonably equivalent value or fair consideration for entering into the guarantee and was one of the following:
•insolvent or rendered insolvent by reason of entering into a guarantee; •engaged in a business or transaction for which the guarantor's remaining assets constituted unreasonably small capital; or
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--------------------------------------------------------------------------------•intended to incur, or believed that it would incur, debts or contingent liabilities beyond its ability to pay them as they became due.
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. Pursuant to amended Rule 3-10 of Regulation S-X, the following aggregate summarized financial information is provided forCyrusOne Inc. ,CyrusOne LP andCyrusOne Finance Corp. This aggregate summarized financial information has been prepared from the books and records maintained byCyrusOne ,CyrusOne LP andCyrusOne Finance Corp. The aggregate summarized financial information does not include the investments in non-guarantor subsidiaries nor the earnings from non-guarantor subsidiaries and therefore is not necessarily indicative of the results of operations or financial position hadCyrusOne LP andCyrusOne Finance Corp. operated as independent entities. Intercompany transactions have been eliminated. The Issuers and Guarantors had Intercompany receivables from non-guarantors of$1.1 billion and$1.8 billion for the periods endedDecember 31, 2021 and 2020, respectively. The Issuers and Guarantors had Debt of$2.9 billion and$3.4 billion for the periods endedDecember 31, 2021 and 2020, respectively. During the year endedDecember 31, 2021 , the Issuers and Guarantors had Interest expense, net of$72.6 million and Foreign currency and derivative gains, net of$43.6 million . More detailed financial information for the Issuers and Guarantors was not material. 75
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