Real estate investment trusts (REITs) generally fall into one of two categories: income or growth. CyrusOne (NYSE: CONE) definitely resides in the latter category, given it sports a modest 3% or so yield. Backing that up, however, is an annualized dividend growth rate of nearly 12% over the past five years. That's great, but what dividend growth investors really want to know is what the next few years will hold. Here's some thoughts on that.
A growing sector
It would be hard to call the internet the next big thing, since it's already a big thing. And yet, it's still a fast-growing sector, as more business gets performed in a digital manner. In fact, the coronavirus pandemic has proven the world can do even more online than it perhaps thought possible before people were forced to socially distance. Data center landlord CyrusOne has been growing, and is definitely looking to keep growing, along with the digitization of the world.
With a roughly $8 billion market cap, CyrusOne is a relatively small fry in the sector, which is headed by giant Equinix (NASDAQ: EQIX) and its approximately $60 billion market cap. However, that doesn't mean CyrusOne can't compete. In fact, the REIT's diminutive size will make growth easier to come by, since smaller transactions have a bigger impact on its top and bottom lines.
And CyrusOne is not lacking expansion opportunities, given that it operates in the United States, Europe, and Asia, with a customer base that includes around 200 Fortune 1000 companies. It's relatively small, but it's still a notable player.
The driving force from here will be portfolio growth. Although CyrusOne has used acquisitions in the past, notably to quickly expand in Europe, near-term growth is likely to come largely from ground-up construction.
This is why investors need to keep a close watch on CyrusOne's backlog of construction projects. At the end of 2020, it had projects underway in four U.S. cities and four European cities, including notable development efforts in New York, Frankfurt, Dublin, and Paris. Roughly half of the projects have contractually committed customers, so they'll come online at least partially full. Management described the $101 million backlog as a record for the company during CyrusOne's fourth-quarter 2020 earnings conference call.
More important, it noted that contracts signed so far de-risk 2021 growth plans and set the company up for a strong 2022. A piece of that comes from the fact it can continue to fill up these new centers, further augmenting its top and bottom lines. Totaling it all up, the current projects, when completed, will increase the size of the portfolio by 20%, according to management. Roughly half of the revenue expected to be produced from these projects should start flowing in the first half of 2021. But the rest is spread out through 2026, with notable increases in the back half of 2021 and in 2022 and 2023.
In other words, CyrusOne has a fairly sizable expansion plan laid out right now that will take it through roughly the next three years (longer, actually) and lead to a notable increase in the size of the business. If you're looking at CyrusOne today, you'll want to keep a very close eye on its construction progress and its success at further leasing these assets. Both will be important determinants of the data center REIT's business performance over the next three years.
The outlook: Bigger
So, where will CyrusOne be in three years? The answer is one simple word: bigger. But that doesn't do full justice to the effort, because it will involve a lot of ground-up construction. And while half of the space is already under contract, it still needs to find other customers to fill it out. Yes, this all suggests a desirable period of growth is on tap, but investors need to watch closely, because CyrusOne one still needs to execute well along the way.