CyrusOne Inc. has announced the execution of a definitive agreement to purchase two enterprise-class data centers (collectively, the "facilities") located in Raleigh-Durham, North Carolina and Somerset, New Jersey from Sentinel Data Centers ("Sentinel"). The total purchase price is $490 million, excluding transaction-related expenses. This represents a multiple of approximately 14.4 times pro forma run-rate annualized EBITDA of approximately $34 million.
"We are very excited about this transaction, which establishes a presence for us in the Southeast, adds a high quality portfolio of large enterprise customers, and features an attractive long-term lease profile," said Gary Wojtaszek, president and chief executive officer of CyrusOne. "We respect the work of the Sentinel founders. Their focus on great facilities and personalized customer service matches ours. The transaction is expected to be immediately accretive and provides significant opportunities to grow the combined business and create value for our shareholders."
"We are thrilled to be able to announce this transaction," said Todd Aaron, Sentinel's co-founder and co-CEO. "We have a fantastic set of customers and investors, and we believe this to be a win-win for both of them."
"We have known the CyrusOne team for almost ten years and have a great deal of respect for their organization," said Josh Rabina, Sentinel's co-founder and co-CEO. "They have earned an excellent reputation in the industry for customer service and quality, so we know our customers are in good hands."
CyrusOne intends to finance the acquisition with proceeds from its forward equity sale completed last August 2016 and its recently expanded credit facility. The transaction is expected to close in the next 30 to 45 days, subject to the fulfillment of customary closing conditions.
When completed the transaction will add two high-quality data centers serving the Southeast and Northeast, complementing CyrusOne's existing data center platform. In 2016, the Facilities generated revenue of nearly $50 million. As of December 31, 2016, the two properties consisted of more than 160,000 colocation sq ft and approximately 21 megawatts ("MW") of power capacity, with nearly 85% of the power capacity leased. The facilities will be owned by CyrusOne.
Raleigh-Durham Data Center
- Current power capacity: 10 MW (approximately 70% leased)
- Wtd. avg. remaining lease term: nearly nine years
- Lease-up / expansion opportunity: 23 MW
Somerset, NJ Data Center
- Current power capacity: 11 MW (approximately 95% leased)
- Wtd. avg. remaining lease term: nearly eight years
- Lease-up / expansion opportunity: 22 MW
Taking into account the impact of this transaction, the NOI contribution from facilities fully owned by CyrusOne will increase to nearly 80%.
The transaction is expected to provide additional benefits to CyrusOne, including the following:
- Enhanced geographic diversification: This transaction enhances CyrusOne's geographic diversification, establishing a presence in the Southeast, a previously stated strategic goal for the Company. In addition, the Raleigh-Durham market will represent the lowest power cost in CyrusOne's portfolio and one of the lowest in the United States. The Somerset, New Jersey, data center further expands the company's Northeast footprint, providing additional options for the combined customer base to deploy disaster recovery facilities across New Jersey using the company's National IX product to link them together.
- Long-term leases with high quality customer base: The weighted average remaining lease term of the Sentinel portfolio is more than eight years, with only 3% of rent due for renewal through 2019. The facilities consist of nearly 30 customers, more than two-thirds of which will be new to CyrusOne, including five new Fortune 1000 companies. Approximately 70% of the portfolio rent is generated from investment grade customers.
- Increased penetration in health care and financial services verticals: Over 80% of rent from the facilities is generated from customers in the health care and financial services verticals. With respect to the health care vertical, taking into account these new customers, the transaction is expected to more than double the contribution from this industry group to the combined CyrusOne portfolio.
- Additional development opportunity: There are approximately 34,000 colocation sq ft and 8 MW of power capacity that are either currently available for lease or can be developed in the near term at a total cost of less than $15 million. CyrusOne also has the ability to add another 230,000 colocation sq ft and 37 MW of power capacity at a cost expected to be in line with the company's current build cost per MW, more than doubling the footprint of the two data centers. This additional capacity will enhance the overall value of the transaction to CyrusOne as the company fully develops the facilities over time to meet customer demand.
The acquisition is expected to be immediately accretive to Normalized FFO per diluted share. CyrusOne also plans to develop additional capacity over time, which is expected to create incremental income accretion and long-term value creation. The Company will provide combined guidance for 2017 in its fourth quarter 2016 earnings release, which will be issued after the market closes on Wednesday, February 22. Additional details surrounding the transaction will be provided on CyrusOne's fourth quarter 2016 earnings call on Thursday, February 23.
Legal and Financial Advisors
DLA Piper served as primary external legal counsel for CyrusOne. For Sentinel, DH Capital served as its exclusive financial advisor and Skadden, Arps, Slate, Meagher & Flom, LLP as legal counsel. In addition to its founders, significant Sentinel investors include affiliates of Kelso & Company and Russo Development.