Document
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
  
FORM 10-Q

ý
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the quarterly period ended March 31, 2019
¨
TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ___________ to ___________
Commission File Number: 001-35789
CyrusOne Inc.
(Exact name of registrant as specified in its charter)
Maryland
46-0691837
(State or other jurisdiction of
incorporation or organization)
(I.R.S. Employer
Identification No.)
2101 Cedar Springs Road, Suite 900, Dallas, TX 75201
(Address of Principal Executive Offices) (Zip Code)

(972) 350-0060
(Registrant’s telephone number, including area code)



Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.    

Yes  ý    No  ¨
Indicate by check mark whether the registrant has submitted electronically every Interactive Data File required to be submitted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit such files).    
Yes  ý    No  ¨



Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, a smaller reporting company or an emerging growth company. See the definitions of "large accelerated filer", "accelerated filer", "smaller reporting company" and "emerging growth company" in Rule 12b-2 of the Exchange Act.

Large accelerated filer
ý
Accelerated filer
¨
Non-accelerated filer
¨
Smaller reporting company
¨
 
 
Emerging growth company
¨
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
Yes  ¨    No  ý
Securities registered pursuant to Section 12(b) of the Act:
Title of each class
Trading Symbol(s)
Name of each exchange on which registered
Common Stock, $0.01 par value
CONE
The NASDAQ Global Select Market
There were 113,172,973 shares of common stock outstanding as of April 25, 2019 with a par value of $0.01 per share.



EXPLANATORY NOTE

Unless otherwise indicated or unless the context requires otherwise, all references in this report to "we," "us," "our," "our Company" or "the Company" refer to CyrusOne Inc., a Maryland corporation, together with its consolidated subsidiaries, including CyrusOne LP, a Maryland limited partnership. Unless otherwise indicated or unless the context requires otherwise, all references to "our operating partnership" or "the operating partnership" refer to CyrusOne LP together with its consolidated subsidiaries.

CyrusOne Inc. is a real estate investment trust, or REIT, whose only material asset is its ownership of operating partnership units of CyrusOne LP. As a result, CyrusOne Inc. does not conduct business itself, other than acting as the sole beneficial owner and sole trustee of CyrusOne GP (the sole general partner of CyrusOne LP), a Maryland statutory trust, issuing public equity from time to time and guaranteeing certain debt of CyrusOne LP and certain of its subsidiaries. CyrusOne Inc. itself does not issue any indebtedness but guarantees the debt of CyrusOne LP and certain of its subsidiaries, as disclosed in this report. CyrusOne LP and its subsidiaries hold substantially all the assets of the Company. CyrusOne LP conducts the operations of the business, along with its subsidiaries, and is structured as a partnership with no publicly traded equity. Except for net proceeds from public equity issuances by CyrusOne Inc., which are generally contributed to CyrusOne LP in exchange for operating partnership units, CyrusOne LP generates the capital required for the Company's business through CyrusOne LP's operations and by CyrusOne LP's incurrence of indebtedness.
As of March 31, 2019, the total number of outstanding shares of our common stock was approximately 110.3 million. CyrusOne Inc., directly or indirectly, owns all the operating partnership units of CyrusOne LP. As the direct or indirect owner of all the operating partnership units of CyrusOne LP and as sole beneficial owner and sole trustee of CyrusOne GP, which is the sole general partner of CyrusOne LP, CyrusOne Inc. has the full, exclusive and complete responsibility for the operating partnership's day-to-day management and control.




INDEX
 
Page
PART I. FINANCIAL INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
PART II. OTHER INFORMATION
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 



PART I—FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CyrusOne Inc.
CONDENSED CONSOLIDATED BALANCE SHEETS
(in millions, except share and per share amounts)
(unaudited)
 
March 31, 2019
December 31, 2018
Assets
 
 
Investment in real estate:
 
 
Land
$
124.9

$
118.5

Buildings and improvements
1,649.2

1,677.5

Equipment
2,799.6

2,630.2

Gross operating real estate
4,573.7

4,426.2

Less accumulated depreciation
(1,122.5
)
(1,054.5
)
       Net operating real estate
3,451.2

3,371.7

Construction in progress, including land under development
734.7

744.9

Land held for future development
200.4

176.4

Total investment in real estate, net
4,386.3

4,293.0

Cash and cash equivalents
126.0

64.4

Rent and other receivables
248.7

234.9

Restricted cash
1.3


Operating lease right-of-use assets
83.8


Equity investments
299.3

198.1

Goodwill
455.1

455.1

Intangible assets (net of accumulated amortization of $177.0 and $166.9 as of March 31, 2019 and December 31, 2018, respectively)
226.1

235.7

Other assets
114.8

111.3

Total assets
$
5,941.4

$
5,592.5

Liabilities and equity
 
 
Debt
$
2,898.6

$
2,624.7

Finance lease liabilities
33.4

156.7

Operating lease liabilities
119.6


Construction costs payable
155.5

195.3

Accounts payable and accrued expenses
81.6

121.3

Dividends payable
51.5

51.0

Deferred revenue and prepaid rents
155.9

148.6

Deferred tax liability
67.2

68.9

Total liabilities
3,563.3

3,366.5

Commitments and contingencies


Stockholders' equity
 
 
Preferred stock, $.01 par value, 100,000,000 authorized; no shares issued or outstanding


Common stock, $.01 par value, 500,000,000 shares authorized and 110,316,652 and 108,329,314 shares issued and outstanding at March 31, 2019 and December 31, 2018, respectively
1.1

1.1

Additional paid in capital
2,938.2

2,837.4

Accumulated deficit
(552.2
)
(600.2
)
Accumulated other comprehensive loss
(9.0
)
(12.3
)
Total stockholders’ equity
2,378.1

2,226.0

Total liabilities and equity
$
5,941.4

$
5,592.5


The accompanying notes are an integral part of the condensed consolidated financial statements.

5


CyrusOne Inc.
CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
(in millions, except per share data)
(unaudited)

 
Three Months Ended March 31,
 
2019
2018
Revenue
$
225.0

$
196.6

Operating expenses:
 
 
Property operating expenses
83.3

67.8

Sales and marketing
5.3

5.3

General and administrative
22.2

19.3

Depreciation and amortization
102.1

74.6

Transaction, acquisition, integration and other related expenses
0.3

1.9

Total operating expenses
213.2

168.9

Operating income
11.8

27.7

Interest expense
(23.7
)
(20.8
)
Unrealized gain on marketable equity investment
101.2

40.5

Loss on early extinguishment of debt

(3.1
)
Other expense
(0.1
)

Net income before income taxes
89.2

44.3

Income tax benefit (expense)
0.2

(0.8
)
Net income
$
89.4

$
43.5

Weighted average number of common shares outstanding - basic
108.3

96.0

Weighted average number of common shares outstanding - diluted
108.8

96.6

Income per share - basic
$
0.82

$
0.45

Income per share - diluted
$
0.82

$
0.45


The accompanying notes are an integral part of the condensed consolidated financial statements.

6


CyrusOne Inc.
CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in millions)
(unaudited)

 
Three Months Ended March 31,
 
2019
2018
Net income
$
89.4

$
43.5

Other comprehensive income:
 
 
Foreign currency translation adjustment
0.6

0.1

Net derivative gain (loss) on cash flow hedging instruments
2.7


Comprehensive income
$
92.7

$
43.6


The accompanying notes are an integral part of the condensed consolidated financial statements.

7


CyrusOne Inc.
CONDENSED CONSOLIDATED STATEMENTS OF EQUITY
(in millions)
(unaudited)

 
Stockholders' Equity
 
Shares of Common Stock Outstanding
Common Stock
Additional
Paid-In
Capital
Accumulated
Deficit
Accumulated Other Comprehensive Income (Loss)
Total
Stockholders'
Equity
 
Balance at January 1, 2018
96.1

$
1.0

$
2,125.6

$
(486.9
)
$
74.2

$
1,713.9

Adoption of accounting standards:
 
 
 
 
 


     Revenue recognition, cumulative modified retrospective



0.3


0.3

     Financial instruments (equity investment), cumulative adjustment



75.6

(75.6
)

Net income



43.5


43.5

Issuance of common stock, net
2.8


142.9



142.9

Stock-based compensation expense


3.9



3.9

Tax payment upon exercise of equity awards


(4.4
)


(4.4
)
Foreign currency translation adjustment




0.1

0.1

Dividends declared, $0.46 per share



(45.6
)

(45.6
)
Balance at March 31, 2018
98.9

$
1.0

$
2,268.0

$
(413.1
)
$
(1.3
)
$
1,854.6

 
 
 
 
 
 
 
Balance at January 1, 2019
108.3

$
1.1

$
2,837.4

$
(600.2
)
$
(12.3
)
$
2,226.0

Adoption of accounting standards:
 
 
 


 


     Impact of adoption of ASU 2016-02 related to leases (See Note 3)



9.5


9.5

Net income



89.4


89.4

Issuance of common stock, net
2.0


105.0



105.0

Stock-based compensation expense


4.5



4.5

Tax payment upon exercise of equity awards


(8.7
)


(8.7
)
Foreign currency translation adjustment




0.6

0.6

Net derivative gain (loss) on cash flow hedging instruments




2.7

2.7

Dividends declared, $0.46 per share



(50.9
)

(50.9
)
Balance at March 31, 2019
110.3

$
1.1

$
2,938.2

$
(552.2
)
$
(9.0
)
$
2,378.1


The accompanying notes are an integral part of the condensed consolidated financial statements.



8


CyrusOne Inc.
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(in millions)
(unaudited)
 
Three Months Ended March 31,
 
2019
2018
Cash flows from operating activities:
 
 
Net income
$
89.4

$
43.5

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
Depreciation and amortization
102.1

74.6

Provision for bad debt expense

0.5

Unrealized gain on marketable equity investment
(101.2
)
(40.5
)
Loss on early extinguishment of debt

3.1

Interest expense amortization, net
1.2

0.7

Stock-based compensation expense
4.5

3.9

Deferred income tax expense
(0.8
)

Operating lease cost
5.0


Other
(0.5
)

Change in operating assets and liabilities:
 
 
Rent and other receivables, net and other assets
(18.0
)
(18.0
)
Accounts payable and accrued expenses
(39.8
)
(28.9
)
Deferred revenue and prepaid rents
7.1

5.3

Operating lease liabilities
(5.1
)

Net cash provided by operating activities
43.9

44.2

Cash flows from investing activities:
 
 
Investment in real estate
(301.9
)
(145.2
)
Net cash used in investing activities
(301.9
)
(145.2
)
Cash flows from financing activities:
 
 
Issuance of common stock, net
105.0

142.9

Dividends paid
(50.4
)
(41.0
)
Proceeds from revolving credit facility
275.7


Proceeds from unsecured term loan

985.6

Repayments of unsecured term loan

(902.7
)
Payments on finance lease liabilities
(0.6
)
(2.6
)
Tax payment upon exercise of equity awards
(8.7
)
(4.4
)
Net cash provided by financing activities
321.0

177.8

Effect of exchange rate changes on cash, cash equivalents and restricted cash
(0.1
)

Net increase in cash, cash equivalents and restricted cash
62.9

76.8

Cash, cash equivalents and restricted cash at beginning of period
64.4

151.9

Cash, cash equivalents and restricted cash at end of period
$
127.3

$
228.7

Supplemental disclosure of cash flow information:
 
 
Cash paid for interest, including amounts capitalized of $9.3 million and $5.1 million in 2019 and 2018, respectively
$
46.7

$
42.2

Cash paid for income taxes

0.3

Non-cash investing and financing activities:
 
 
Construction costs and other payables
155.5

89.0

Dividends payable
51.5

46.4


The accompanying notes are an integral part of the condensed consolidated financial statements.

9

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)



1. Description of Business

CyrusOne Inc., together with CyrusOne GP (the "General Partner"), a wholly-owned subsidiary of CyrusOne Inc., through which CyrusOne Inc. wholly owns CyrusOne LP (the "Operating Partnership") and the subsidiaries of the Operating Partnership (collectively, "CyrusOne", "we", "us", "our", and the "Company") is an owner, operator and developer of enterprise-class, carrier-neutral, multi-tenant and single-tenant data center properties. Our customers operate in a number of industries, including information technology, financial services, energy, oil and gas, mining, medical and consumer goods and services. We currently operate 48 data centers and two recovery centers located in the United States, United Kingdom, Germany and Singapore.
On January 24, 2013, the Company completed its initial public offering (the "IPO") of common stock and its common stock currently trades on the NASDAQ Exchange under the ticker symbol "CONE". As of March 31, 2019, all the issued and outstanding Operating Partnership units of CyrusOne LP are owned, directly or indirectly, by the Company.

2. Summary of Significant Accounting Policies
Interim Unaudited Financial Information
The accompanying condensed consolidated financial statements have been prepared in accordance with accounting principles generally accepted in the United States of America ("GAAP") and should be read in conjunction with the financial statements and notes thereto included in our Annual Report on Form 10-K for the year ended December 31, 2018, which was filed with the Securities and Exchange Commission ("SEC") on February 22, 2019. Certain information and footnote disclosures normally included in the consolidated financial statements prepared in accordance with GAAP have been omitted from this report on Form 10-Q pursuant to the rules and regulations of the SEC.
Results for the interim periods in this report are not necessarily indicative of future financial results and have not been audited by our independent registered public accounting firm. In the opinion of management, the accompanying unaudited condensed consolidated financial statements include all adjustments necessary to present fairly our condensed consolidated financial statements as of March 31, 2019 and 2018, and for the three months ended March 31, 2019 and 2018. These adjustments are of a normal recurring nature and consistent with the adjustments recorded to prepare the annual audited consolidated financial statements as of December 31, 2018. All amounts reflected are in millions except share and per share data.

Basis of Presentation

The accompanying condensed consolidated financial statements include the accounts of the Company, as well as all wholly-owned subsidiaries and any consolidated variable interest entities. All intercompany balances and transactions have been eliminated in consolidation.
Reclassifications
Certain financial information has been revised to conform to the current year presentation due to changes in the significance of the particular activity. The following items have been reclassified:
Balance Sheet as of December 31, 2018
Straight-line rent receivable of $128.7 million included in Rent and other receivables was previously included in Other assets.

Statement of Cash Flows for the period ended March 31, 2018
The cash flow effect of the change in proceeds from our unsecured term loan of $985.6 million included in Proceeds from unsecured term loan was previously included in Debt.
The cash flow effect of the change in repayments of our unsecured term loan of $902.7 million included in Repayments of unsecured term loan was previously included in Debt.
Investment in Real Estate
Acquisition of Properties
Investment in real estate consist of land, buildings, improvements and integral equipment utilized in our data center operations. We expect most acquisitions to be an acquisition of assets rather than a business combination as our typical acquisitions consist

10

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


of properties whereby substantially all the fair value of gross assets acquired is concentrated in a single asset set (land, building and in-place leases), which are treated as asset acquisitions. See Business Combinations and Asset Acquisitions herein.
Business Combinations and Asset Acquisitions
We evaluate whether an acquisition is a business combination or an asset acquisition by determining whether the set of assets is a business.
Asset Acquisitions
When substantially all of the fair value of gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the transaction is accounted for as an asset acquisition. Asset acquisitions are recorded at the cumulative acquisition costs and allocated to the assets acquired and liabilities assumed on a relative fair value basis. The Company allocates the purchase price of real estate to identifiable tangible assets such as land, building, land improvements and tenant improvements acquired based on their fair value. In estimating the fair value of each component, management considers appraisals, replacement cost, its own analysis of recently acquired and existing comparable properties, market rental data and other related information. Transaction costs associated with asset acquisitions are capitalized.
Business Combinations
When substantially all of the fair value is not concentrated in a group of similar identifiable assets, the set of assets will generally be considered a business and the Company applies the purchase method for business combinations, where all tangible and identifiable intangible assets acquired and all liabilities assumed are recorded at fair value. Any excess purchase price is recorded as goodwill. Transaction costs associated with business combinations are expensed as incurred.
The following discussion applies to our initial determination of fair value and the resulting subsequent accounting which is generally applicable to both asset acquisitions and business combinations.
The fair value of any tangible real estate assets acquired is determined by valuing the building as if it were vacant, and the fair value is then allocated to land, buildings, equipment and improvements based on available information including replacement cost, appraisal or using net operating income capitalization rates, discounted cash flow analysis or similar fair value models.

We determine in-place lease values based on our evaluation of the specific characteristics of each tenant’s lease agreement and by applying a fair value model. The estimates of fair value of in-place leases include an estimate of carrying costs during the expected lease up periods considering current market conditions. In estimating fair value of in-place leases, we consider items such as real estate taxes, insurance, leasing commissions, tenant improvements and other operating expenses to execute similar leases as well as projected rental revenue and carrying costs during the expected lease up period. We amortize the value of in-place leases acquired to expense over the approximate weighted average remaining term of the leases, adjusted for projected tenant turnover, on a composite basis.

We determine the value of above-market and below-market in-place leases for acquired properties based on the present value (using an interest rate that reflects the risks associated with the leases acquired) of the difference between (1) the contractual amounts to be paid pursuant to the in-place leases and (2) estimates of current market lease rates for the corresponding in-place leases, measured over a period equal to (i) the remaining non-cancellable lease term for above-market leases, or (ii) the remaining non-cancellable lease term plus any renewal options that we consider are reasonably certain that a lessee will execute such renewal option when a lease commences. We record the fair value of above-market and below-market leases as intangible assets or liabilities, and amortize them as an adjustment to revenue over the lease term. 

We determine the fair value of assumed debt by calculating the net present value of the scheduled debt service payments using current market-based terms for interest rates for debt with similar terms that management believes we could obtain on similar structures and maturities. Any difference between the fair value and stated value of the assumed debt is recorded as a discount or premium and amortized over the remaining life of the loan.

In a business combination or an acquisition, we retain the previous lease classification unless there is a lease modification and that modification is not accounted for as a separate new lease. We elected to apply the short-term lease measurement and recognition exemption available under the new accounting standard for leases (discussed below in Note 3. "Recently Adopted Accounting Standards") to leases that have a remaining lease term of 12 months or less at the acquisition date and would not recognize an intangible asset if the terms of an operating lease are favorable relative to market terms or a liability if the terms are unfavorable

11

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


relative to market terms. Leasehold improvements are amortized over the shorter of the useful life of the assets and the remaining lease term at the date of acquisition.
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. 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
When events or circumstances indicate that the carrying amount of a real estate investment may not be recoverable, we review the carrying value of the asset. When such impairment indicators exist, we review an estimate of the undiscounted future cash flows expected to result from the use of the real estate investment and proceeds from its eventual disposition and compare such amount to the carrying amount of the real estate investment. If our undiscounted cash flows indicate that we are unable to recover the carrying value of the real estate investment, an impairment loss is recognized. An impairment loss is measured as the amount by which the real estate investment's carrying value exceeds its estimated fair value. We did not record any impairment losses for the three months ended March 31, 2019 or 2018.
Cash and Cash Equivalents and Restricted Cash
Cash and cash equivalents include all non-restricted cash held in financial institutions and other non-restricted highly liquid short-term investments with original maturities of three months or less. Restricted cash includes cash equivalents held in our name to collateralize standby letters of credit or its use is restricted by contract or regulation.
Equity Investments

We hold investments in various joint ventures where the Company evaluates its ability to influence the operating or financial decisions of the investee in applying the appropriate method of accounting for such investments. Influence tends to be more effective as the investor's percent of ownership in the voting rights of the investee increases. Our equity investments represent less than 20% of the voting rights of the investees and we do not exercise influence over the investee's operating and financial decisions. Accordingly, we do not account for our equity investments using the equity method accounting. For further information about our equity investments, see Note 7. "Equity Investments".

Our investment in GDS Holdings Limited ("GDS") is classified as "available for sale" and is carried at fair value.

Revenue Recognition

Our revenue consists of lease revenue and revenue from contracts with customers. The Company 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, the Company 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 3. “Recently Adopted Accounting Standards” and Note 4. “Revenue Recognition”.


12

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)



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.
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 sheet. Some of our leases are structured on a gross basis in which the customer pays a fixed amount for colocation rent and power. The revenue for these types of leases is recorded in colocation lease 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 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 from Contracts with Customers
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 of 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.
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. 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 service revenue is measured based on the consideration specified in the contract and recognized over time as we satisfy the performance obligation.
Rent and Other Receivables
Receivables consist principally of trade receivables from customers and straight-line rent receivables with estimated credit losses recorded as an allowance for doubtful accounts.
Foreign Currency Translation and Transactions
The financial position of foreign subsidiaries is translated at the exchange rates in effect at the end of the period, while revenues and expenses are translated at average exchange rates during the period. Gains or losses from translation of foreign operations where the local currency is the functional currency are included as components of other comprehensive income (loss). Gains or losses from foreign currency transactions are included in determining net income.
Stock-Based Compensation
We have a stock-based incentive award plan for our employees and directors. Stock-based compensation expense associated with these awards is recognized in general and administrative expenses, property operating expenses, and sales and marketing expenses in our consolidated statements of operations. We measure stock-based compensation at the estimated fair value on the grant date

13

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


and recognize the amortization of stock-based compensation expense over the requisite service period. Fair value is determined based on assumptions related to volatility, interest rates and the market, and our company performance.
Fair Value Measurements
Fair value measurements are utilized in accounting for business combinations, asset acquisitions, testing of goodwill and other long-lived assets for impairment, recording unrealized gain/loss on available-for-sale securities and related disclosures. Fair value of financial and non-financial assets and liabilities is defined as an exit price, representing the amount that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. The three-tier hierarchy that prioritizes certain inputs used in the methodologies of measuring fair value for asset and liabilities, is as follows:
Level 1—Observable inputs for identical instruments such as quoted market prices;
Level 2—Inputs include quoted prices for similar assets and liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (i.e., interest rates, yield curves, etc.), and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs); and
Level 3—Unobservable inputs that reflect our determination of assumptions that market participants would use in pricing the asset or liability. These inputs are developed based on the best information available, including our own data.

Derivative Instruments

Derivative instruments are measured at fair value and recorded as assets or liabilities, depending on our rights or obligations under the applicable derivative contract. Derivatives that are not designated as hedges must be adjusted to fair value through earnings. For a derivative designated and that qualified as a cash flow hedge, the effective portion of the change in fair value of the derivative is recognized in the condensed consolidated statement of comprehensive income (loss) until the hedged item is recognized in earnings. Any ineffective portion of a derivative's change in fair value is immediately recognized in earnings. For interest rate derivatives amounts recognized in earnings are reflected in interest expense. For a derivative designated and that qualified as a net investment hedge, the effective portion of the change in the fair value and/or the net settlement of the derivative are reported in the condensed consolidated statement of comprehensive income (loss) as part of the cumulative foreign currency translation adjustment. Any ineffective portion of the change in fair value of the derivative is recognized directly in earnings. Amounts are reclassified out of other comprehensive income (loss) into earnings when the hedged investment is either sold or substantially liquidated.

3. Recently Adopted Accounting Standards

Leases

We adopted ASU 2016-02 (codified in ASC 842, Leases) on January 1, 2019, applied the package of practical expedients included therein and utilized the modified retrospective transition method with the cumulative effect of transition on the effective date. By applying the modified retrospective transition method, the presentation of financial information for periods prior to January 1, 2019 were not restated.

We elected the package of practical expedients, which permits us to not reassess (1) whether any expired or existing contracts are or contain leases, (2) the lease classification for any expired or existing leases, and (3) any initial direct costs for any existing leases as of the effective date. We did not elect the hindsight practical expedient, which permits entities to use hindsight in determining the lease term and assessing impairment.

As a Lessee

The ASU requires that a liability be recorded on the balance sheet for all leases where the reporting entity is a lessee, based on the present value of future lease obligations. A corresponding right-of-use ("ROU") asset will also be recorded. Amortization of the lease obligation and the ROU asset for leases classified as operating leases are on a straight-line basis. Leases classified as financing leases are required to be accounted for as financing arrangements similar to the accounting treatment for capital leases under ASC 840, Leases (the former accounting standard for all leases, ("ASC 840")).

We elected the practical expedient to combine our lease and related non-lease components by asset class for our leases.

14

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


We elected a practical expedient to not evaluate land easements not previously accounted for as leases prior to the entity’s adoption of the new accounting standard for leases.

We elected to apply the short-term lease measurement and recognition exemption available for leases under the new accounting standard for leases that have a remaining lease term of 12 months or less.

The adoption of ASC 842 had a significant impact on our consolidated balance sheet due to the recognition of approximately $87.0 million of ROU assets and $123.2 million of lease liabilities for operating leases. We recognized a $9.5 million cumulative effect adjustment to retained earnings. The adjustment to retained earnings was driven principally by measurement of operating lease liabilities at the present value of the remaining lease payments at the adoption date of January 1, 2019. The increase was offset in part by impairment of ROU assets associated with one build-to-suit ("BTS") arrangement recognized as an operating lease under the new accounting standard for leases.

Additionally, we de-recognized certain previously recognized BTS lease assets and liabilities which under the new accounting standard for leases are recognized as operating lease ROU assets and lease liabilities. Prior to the adoption of the new accounting standard for leases, these leases were accounted as financing arrangements or BTS leases assets and liabilities and recorded as buildings and improvement and lease financing arrangements. The table below reflects the impact of adoption of the lease standard on our consolidated balance sheet for the period ended March 31, 2019 (in millions) related to previously reported BTS leases:
Impact to the consolidated balance sheets:
For the period ended December 31, 2018
For the period ended March 31, 2019
Buildings and improvements
$
77.4

$

Operating lease right-of-use assets

50.0

Finance lease liabilities
123.3


Operating lease liabilities

85.5

Prior to the adoption of the new accounting standard for leases, BTS lease assets were amortized over the useful life of the asset and recorded as amortization expense and accretion of BTS lease liability was recorded as an interest expense in consolidated statement of operations. Upon adoption of the new accounting standard for leases, BTS leases are accounted as operating leases and amortization and accretion of lease liabilities of these operating leases are recorded as lease expenses in property operating expenses in our consolidated statement of operations.

As a Lessor

The accounting for lessors remained largely unchanged from ASC 840. However, the new accounting standard for leases requires that lessors expense certain costs to obtain a lease that are not incremental to origination of a lease. Upon adoption, initial direct cost that are not incremental are expensed as general and administrative expense in our consolidated statements of operations. Prior to the adoption of new standard, these costs were capitalizable. As a result of electing the package of practical expedients, initial direct costs have not been reassessed prior to the effective date and therefore adoption of the lease standard did not have an impact on our previously reported consolidated statements of operations with respect to initial direct costs.

In addition, under the new accounting standard for leases certain exceptions under the previous standard for real estate no longer are applicable in the evaluation of the lease classification as an operating, sales type or direct financing lease. In the event that a real estate lease is classified as sales-type lease, subject to certain conditions, a gain or loss is recognized based on the present value of the lease payments and residual value.

We elected the practical expedient to combine all of our lease and nonlease revenue components into a single combined lease component as nonlease components have the same pattern of transfer as the related predominant operating lease component. Our customer leases include options to extend or terminate the lease agreements. We do not generally include extension or termination options in a customer’s lease term for lease classification purposes or for recognizing lease revenue unless we are reasonably certain the customer will exercise these extension or termination options at lease commencement.

Revenue from contracts with customers

On January 1, 2018, we adopted the FASB pronouncement ASU 2014-09 with respect to revenue recognition. The revised guidance outlines a single comprehensive model for entities to use in accounting for revenue arising from contracts with customers and

15

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


superseded prior revenue recognition guidance, including industry-specific revenue guidance. The revised guidance replaced most existing revenue and real estate sale recognition guidance in GAAP. The standard specifically excludes lease contracts, which is our primary recurring revenue source; however, our revenue accounting for managed services and sales of real estate and equipment will follow the revised guidance. We adopted the new standard using the modified retrospective transition method, where financial statement presentations prior to the date of adoption are not adjusted. Transactions that were not closed as of the adoption date were adjusted to reflect the new standard and we recorded an adjustment to beginning retained earnings of $0.3 million.
As allowed under GAAP, we have adopted the practical expedient that allows us not to disclose information about remaining performance obligations that have original expected durations of one year or less, the amount of the transaction price allocated to the remaining performance obligations and when we expect to recognize that amount as revenue for the year. We have also adopted the "as invoiced" practical expedient, whereby the Company recognizes revenue in the amount that directly corresponds to the amount of value transferred to the customer.
Share based payments granted to nonemployees

We adopted ASU 2018-07, Compensation-Stock Compensation (Topic 718) which simplifies the accounting for share-based payments granted to nonemployees for goods and services. Under this ASU, the guidance on such payments to nonemployees aligns with the requirements for share-based payments granted to employees. The adoption did not have a significant impact as the Company accounts for its share-based payments.

Equity investments

On January 1, 2018, we adopted ASU 2016-01 related to equity investments. Equity investments (except those accounted for under the equity method of accounting or those that result in consolidation of the investee) are measured at fair value with changes in fair value recognized in net income. Prior to adoption of this update, changes in fair value for available for sale equity investments were recorded in other comprehensive income (loss). The adoption of the new standard was made through a cumulative-effect adjustment to beginning retained earnings of $75.6 million.

New Accounting Pronouncements

In August 2018, the SEC issued Securities Act Release No. 33-10532, Disclosure Update and Simplification, which amends certain of its disclosure requirements and is intended to facilitate the disclosure of information to investors and simplify compliance without significantly altering the total mix of information provided to investors. The amendments became effective on November 5, 2018. Among the amendments is the requirement to present the changes in shareholders' equity in the interim financial statements (either in a separate statement or footnote) in quarterly reports on Form 10-Q. In accordance with the SEC's rule, the company's first presentation of changes in shareholders’ equity is shown in this Form 10-Q for the quarter ended March 31, 2019.
 
In August 2018, the FASB issued ASU 2018-15, which clarifies the accounting for implementation costs incurred in a hosting arrangement that is a service contract. Capitalization of these implementation costs are accounted for under the same guidance as implementation costs incurred to develop or obtain internal-use software and recorded as a prepaid asset. These capitalized costs are to be expensed ratably over the hosting arrangement term as operating expense, along with the service fees. The guidance is effective for periods beginning after December 15, 2019. Early adoption is allowed. The Company is evaluating the impact of the new standard but does not believe that adoption will have a significant impact on the Company.

In August 2018, the FASB issued ASU 2018-13, which changes the fair value measurement disclosure requirements of ASC 820, Fair Value Measurement. The amendments are part of the FASB’s disclosure framework project to improve the effectiveness of disclosures in the notes to the financial statements by facilitating clear communication of the information required by GAAP that is most important to financial statement users and are intended to improve the effectiveness of disclosure requirements on fair value measurement by using those concepts. The guidance is effective for periods beginning after December 15, 2019. Early adoption is allowed. The Company is evaluating the impact of the new standard.

In June 2016, the FASB issued ASU 2016-13 providing guidance which requires certain financial assets to be presented at the net amount expected to be collected. The guidance will apply to our trade receivables, notes receivable, net investments in leases and any other future financial assets that have the contractual right to receive cash that we may acquire in the future. The guidance is effective for periods beginning for us January 1, 2020. Early adoption is allowed. We are currently evaluating the impact of the new standard.


16

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


4. Revenue Recognition
Lease Revenue
Lease revenue primarily consists of colocation rent and metered power reimbursements from the lease of our data centers. Colocation leases may include all or portions of a data center, where customers may also lease office space to support their colocation operations. Revenue is primarily based on power usage as well as square footage. Customer lease arrangements customarily contain provisions that allow for renewal or continuation on a month-to-month arrangement, and certain leases contain early termination rights. We do not include any of these extension or termination options in a customer’s lease term for lease classification purposes or for recognizing lease revenue unless we are reasonably certain the customer will exercise these extension or termination options at lease commencement. At lease inception, early termination is generally not deemed probable due to the significant economic penalty incurred by the lessee to exercise its early termination right and to relocate their equipment installed in our facilities. Our customer lease arrangements generally do not provide any option to purchase a leased asset and are classified as operating leases.

The future minimum lease payments to be received under non-cancellable operating leases, excluding month-to-month arrangements and metered power reimbursements are shown below:
For the Period Ended March 31, 2019
Minimum Lease Payments
2019
$
520.1

2020
631.9

2021
542.8

2022
454.3

2023
365.2

2024
295.9

Thereafter
940.0

Total
$
3,750.2


Disclosures related to periods prior to adoption of the New Accounting Standard for Leases

The future minimum lease payments to be received under non-cancellable operating leases, excluding month-to-month arrangements and metered power reimbursements are shown below:
For the Period Ended December 31, 2018
Minimum Lease Payments
2019
$
647.6

2020
553.7

2021
453.0

2022
365.5

2023
284.4

Thereafter
835.9


Revenue from Contracts with Customers
Revenue from equipment sales and the installation of customer equipment is recognized at a point-in-time. Title to such assets are transferred to the customer, and the benefits of the installation service are consumed at the completion of the service.










17

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Disaggregation of Revenue

For the three months ended March 31, 2019 and 2018, revenue disaggregated by primary revenue stream is as follows (in millions).

Lease Revenue
For the period ended March 31, 2019
Colocation (Minimum lease payments)
$
188.4

Meter power reimbursements (Variable lease payments)
28.5

Total Lease revenue
$
216.9


 
Three Months Ended March 31,
Revenue from contracts with customers
2019
2018
Equipment sales
$
3.9

$
5.8

Other revenue
4.2

4.0

Total Revenue from contracts with customers
$
8.1

$
9.8


Other revenue from contracts with customers includes $3.4 million and $3.2 million of revenue from managed services for the period ended March 31, 2019 and March 31, 2018, respectively. Total other revenues from customers generated from operations outside of the United States were insignificant for the three months ended March 31, 2019 and 2018.

The balances from customers contract accounts receivables were $8.2 million and $4.8 million for the three months ended March 31, 2019 and 2018, respectively. Contract assets and contract liabilities were not material at March 31, 2019 and 2018. One customer represented approximately 21% and 19% of our revenue for the three months ended March 31, 2019 and 2018.

5. Leases - As a Lessee

ROU assets represent our right to use an underlying asset for the lease term and lease liabilities represent our obligation to make lease payments arising from the lease. ROU assets and lease liabilities are recognized at the lease commencement date based on the estimated present value of lease payments over the lease term. Variable lease payments consist of non-lease components and services related to the lease. Variable lease payments are excluded from the ROU assets and lease liabilities and are recognized in the period in which the obligation for those payments is incurred. For purposes of determining the lease liability we estimated our incremental borrowing rate, based on information available at the lease commencement date. Fixed contractual payments are recognized on a straight-line basis over the corresponding lease term.

The new accounting standard for leases defines initial direct costs as only the incremental costs of signing a lease. Initial direct costs related to leasing that are not incremental and are expensed as general and administrative expense in our consolidated statements of operations. As a result of electing the package of practical expedients, initial direct costs have not been reassessed prior to the effective date and therefore adoption of the lease standard did not have an impact on our previously reported consolidated statements of operations with respect to initial direct costs.

Our operating lease agreements primarily consist of leased real estate and are included within operating lease ROU assets and operating lease liabilities on the consolidated balance sheets.

Many of our lessee agreements include options to extend the lease, which are not included in our minimum lease payments unless they are reasonably certain to be exercised at lease commencement. Rental expense related to operating leases is recognized on a straight-line basis over the lease term.

We use leasing as a source of financing for certain data center facilities and related equipment. We currently operate five data center facilities subject to finance leases. The remaining terms of our finance leases range from two to twenty-two years. We have options to extend the initial lease term on all but one of these leases. Finance leases are included in buildings and equipment, finance lease liabilities in our consolidated balance sheets.

We currently lease twelve other facilities under operating lease agreements for our data centers, sales offices, international location offices and our corporate headquarters located in Dallas, Texas. Our leases have remaining lease terms ranging from one to seventeen

18

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


years. Some of the leases include options to extend the leases for up to an additional fifteen years. Additionally, our ground lease in Houston has a lease term that expires in 2066.

The components of lease expense were as follows (in millions):
 
Three months ended March 31, 2019
Operating lease cost
$
5.0

Finance lease cost:
 
Amortization of assets
0.6

Interest on lease liabilities
0.5

Total net lease cost
$
6.1


Supplemental balance sheet information related to leases was as follows (in millions, except lease term and discount rate):
 
March 31, 2019
Operating leases:
 
Operating lease right-of-use assets
$
83.8

Operating lease liabilities
$
119.6

Finance leases:
 
Property and equipment, at cost
$
34.0

Accumulated amortization
(3.4
)
Property and equipment, net
$
30.6

Finance lease liabilities
$
33.4

 
 
Weighted average remaining lease term (in years):
 
Operating leases
12.5

Finance leases
17.2

 
 
Weighted average discount rate:
 
Operating leases
4.5
%
Finance leases
5.3
%

Supplemental cash flow and other information related to leases was as follows (in millions):
 
Three months ended March 31, 2019
Cash paid for amounts included in the measurement of lease liabilities:
 
Operating cash flows from operating leases
$
5.1

Operating cash flows from finance leases
0.5

Financing cash flows from finance leases
0.6

 
 
Non-cash right-of-use assets obtained in exchange for lease liabilities:
 
Operating leases
$
87.0









19

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Maturities of lease liabilities were as follows (in millions):
 
March 31, 2019
 
Operating Leases
 
Finance Leases
2019
$
15.3

 
$
3.3

2020
19.5

 
4.3

2021
15.3

 
4.2

2022
15.6

 
3.1

2023
13.4

 
2.0

2024
7.7

 
1.5

Thereafter
71.0

 
30.7

Total lease payments
$
157.8

 
$
49.1

Less: Imputed interest
(38.2
)
 
(15.7
)
Total lease obligations
$
119.6

 
$
33.4


As of March 31, 2019, we have additional operating lease commitments that have not yet commenced of approximately $22.2 million fixed contractual payments for an office lease with a lease term of approximately 12 years.

Disclosures related to periods prior to adoption of the New Accounting Standard for Leases

The following table summarizes aggregate minimum principal payments of the finance lease obligations and future minimum lease payments required under operating leases for the five years subsequent to December 31, 2018, and thereafter (in millions):
 
December 31, 2018
 
Operating Leases
 
Finance Leases
2019
$
5.0

 
$
2.7

2020
4.9

 
2.8

2021
3.7

 
2.9

2022
3.7

 
2.0

2023
3.5

 
1.0

Thereafter
43.4

 
22.0

Total lease payments
$
64.2

 
$
33.4


6. Investment in Real Estate

Land for future development

During the three months ended March 31, 2019, the Company purchased approximately 30 acres of land for $40.1 million. No land purchases were made during the comparable period in 2018.
Real Estate Investments and Intangibles and Related Depreciation and Amortization

As of March 31, 2019 and December 31, 2018, major components of our real estate investments and intangibles and related accumulated depreciation and amortization are as follows (in millions):

20

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


 
March 31, 2019
 
December 31, 2018
 
Investment in Real Estate
Intangibles
 
Investment in Real Estate
Intangibles
 
Buildings and Improvements
Equipment
Customer Relationships
In Place Leases
Other Contractual
 
Buildings and Improvements
Equipment
Customer Relationships
In Place Leases
Other Contractual
Cost
$
1,649.2

$
2,799.6

$
247.1

$
136.6

$
19.4

 
$
1,677.5

$
2,630.2

$
247.1

$
136.0

$
19.5

Less: accumulated depreciation and amortization
(483.8
)
(638.7
)
(141.2
)
(27.5
)
(8.3
)
 
(481.8
)
(572.7
)
(137.9
)
(21.1
)
(7.9
)
Net
$
1,165.4

$
2,160.9

$
105.9

$
109.1

$
11.1

 
$
1,195.7

$
2,057.5

$
109.2

$
114.9

$
11.6


As of March 31, 2019 and December 31, 2018, construction in progress includes $75.9 million and $69.1 million of land which is under active development, respectively.

Depreciation and amortization are calculated using the straight-line method over the useful lives of the assets. The typical life of owned assets are as follows:
Buildings
30 years
Building improvements
30 years
Equipment
20 years

Leased real estate and leasehold improvements are depreciated over the shorter of the asset's useful life or the remaining lease term, including renewal options which are reasonably assured at lease commencement. Depreciation expense related to leased real estate and leasehold improvements was $88.9 million and $66.2 million for the three months ended March 31, 2019 and 2018, respectively.

Other contractual intangibles include trademark/tradename, favorable leasehold interests and above market leases. Amortization expense related to other contractual intangibles was $13.2 million and $8.4 million for the three months ended March 31, 2019 and 2018, respectively.

7. Equity Investments

The Company has an equity investment, accounted for using the fair value method in GDS, a developer and operator of high-performance, large-scale data centers in China. As of March 31, 2019 the American Depositary Share ("ADS") Class A ordinary share equivalent was $35.69 per ADS for an equity investment fair value of $286.7 million. For the three months ended March 31, 2019 and 2018, the unrealized gain on investment of $101.2 million and $40.5 million was recognized in the consolidated statement of operations in unrealized gain on marketable equity investment, respectively.

On October 8, 2018, the Company made an $11.9 million investment in exchange for a 10% equity interest in ODATA Brasil S.A. and ODATA Colombia S.A.S. (collectively "ODATA"). ODATA, a Brazilian headquartered company, specializes in providing colocation services to wholesale customers, such as hyperscale cloud providers, financial services and telecommunications companies, and also to enterprises across multiple industries. On October 30, 2018, the Company made an additional $0.7 million investment in ODATA Colombia S.A.S. In connection with these investments, CyrusOne and ODATA entered a commercial agreement covering leasing activity with CyrusOne customers in the ODATA portfolio. In addition, our Chief Technology Officer joined the ODATA board of directors in October 2018. In evaluating the appropriate accounting method for its investment in ODATA, the Company considered its right to appoint a director to the ODATA board of directors, as well as other relevant factors, in evaluating the Company's ability to exercise significant influence over the operating and financial policies of ODATA as provided in ASC 323-10-15-6 and concluded that the investment should be accounted for under the cost method.


21

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


8. Other Assets

As of March 31, 2019 and December 31, 2018, the components of other assets are as follows (in millions):
 
March 31, 2019
December 31, 2018
Deferred leasing and other contract costs
$
45.6

$
43.6

Prepaid expenses
28.1

26.4

Non-real estate assets, net
18.4

18.4

Other assets
22.7

22.9

Total
$
114.8

$
111.3


Non-real estate assets primarily include administrative related equipment and office leasehold improvements, depreciated or amortized over the shorter of the assets useful life or the related lease term. Other assets primarily includes deposits, fuel inventory and other deferred costs.

9. Debt
As of March 31, 2019 and December 31, 2018, the components of debt are as follows (unless otherwise noted, interest rate and maturity date information are as of March 31, 2019) (in millions):

March 31, 2019
December 31, 2018
Interest Rate(a)
Maturity Date
$3.0 Billion Credit Facility:


 


 
$1.7 Billion Revolving Credit Facility:
 
 
 
March 2022(b)
US Revolver
$
270.0

$

Monthly LIBOR + 1.45%
 
EUR Revolver
145.8

143.0

Monthly EURIBOR + 1.45%
 
2023 Term Loan
1,000.0

1,000.0

Monthly LIBOR + 1.40%
March 2023
2025 Term Loan
300.0

300.0

Monthly LIBOR + 1.70%
March 2025
2024 Notes, including bond premium of $5.2 million
705.2

705.5

5.000
%
March 2024
2027 Notes, including bond premium of $8.8 million
508.8

509.1

5.375
%
March 2027
Deferred financing costs
(31.2
)
(32.9
)


Total
$
2,898.6

$
2,624.7

 
 
(a) - Monthly LIBOR at March 31, 2019 was 2.50%.
(b) - The Company may exercise a one-year extension option, subject to certain conditions.

In March 2019, the Company entered into a cross-currency interest rate swap pursuant to which, we will pay floating interest on €238.1 million and receive floating interest on $270.0 million, to hedge the variability of future cash flows attributable to changes in the 1-month USD LIBOR versus EUR LIBOR rates. The swap matures in December 2019 and net interest payments are recognized in earnings, including $0.3 million reduction in interest expense for the three months ended March 31, 2019.

On March 29, 2018, the Company entered into a new $3.0 billion unsecured credit facility. The new credit facility consists of a $1.7 billion revolving credit facility ("$1.7 Billion Revolving Credit Facility"), which includes a $750.0 million multicurrency borrowing sublimit, a 5-year term loan with commitments totaling $1.0 billion ("2023 Term Loan") and a $300.0 million 7-year term loan ("2025 Term Loan") (collectively, the "$3.0 Billion Credit Facility"). We borrowed $700.0 million under the 2023 Term Loan on March 31, 2018, and the 2023 Term Loan includes a delayed draw feature which allows the Company to draw $300.0 million in up to three tranches over a six-month period in multiple currencies. The Company exercised the draw as a part of the acquisition of Zenium Topco Ltd. and certain other affiliated entities ("Zenium"). The $1.7 Billion Revolving Credit Facility has the option to borrow in non-USD currencies and includes a one-year option which, if exercised by the Company, would extend the final maturity to March 2023. The $3.0 Billion Credit Facility also includes an accordion feature providing for an aggregate increase in the revolving and term components to $4.0 billion, subject to certain conditions. The $1.7 Billion Revolving Credit Facility, 2023 Term Loan and 2025 Term Loan are prepayable at our option.


22

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


On March 29, 2018, borrowings of $1.0 billion under the $3.0 Billion Credit Facility were used to fully retire a previous $2.0 billion credit facility. The previous $2.0 billion credit facility consisted of a $1.1 billion senior unsecured revolving credit facility ("$1.1 Billion Revolving Credit Facility"), a $250.0 million 5-year term loan ("2021 Term Loan") and a $650.0 million 7-year term loan ("2022 Term Loan") (collectively, the "$2.0 Billion Credit Facility"). The aggregate outstanding principal balance of the $2.0 Billion Credit Facility at the date of the prepayment was $900.0 million and we recognized a loss on early extinguishment of debt of $3.1 million.

We pay commitment fees for the unused amount of borrowings on the $1.7 Billion Revolving Credit Facility and fees on any outstanding letters of credit. The commitment fees are equal to 0.25% per annum of the actual daily amount by which the aggregate revolving commitments exceed the sum of outstanding revolving loans and letter of credit obligations. The commitment fees decrease to 0.15% per annum upon 50% or greater utilization. We also paid commitment fees on the $1.1 Billion Revolving Credit Facility through its retirement in March 2018. Commitment fees were $0.5 million and $0.7 million for the three months ended March 31, 2019 and 2018, respectively.

As of March 31, 2019, we had $1,000.0 million, $300.0 million and $415.8 million outstanding under the 2023 Term Loan, the 2025 Term Loan and the $1.7 Billion Revolving Credit Facility, respectively, and additional borrowing capacity under the $3.0 Billion Credit Facility was approximately $1.3 billion (all under the $1.7 Billion Revolving Credit Facility), net of $8.0 million of outstanding letters of credit as of March 31, 2019.
On March 17, 2017, the Operating Partnership and CyrusOne Finance Corp., a single-purpose finance subsidiary, both wholly-owned subsidiaries of the Company (together, the "Note Issuers") completed an offering of $500.0 million aggregate principal amount of 5.000% senior notes due 2024 ("Original 2024 Notes") and $300.0 million aggregate principal amount of 5.375% senior notes due 2027 ("Original 2027 Notes") in a private offering. The Company received proceeds of $791.2 million, net of underwriting costs and other deferred financing costs related to the notes.
On November 3, 2017, the Note Issuers completed an offering of $200.0 million aggregate principal amount of 5.000% senior notes due 2024 ("Additional 2024 Notes") and $200.0 million aggregate principal amount of 5.375% senior notes due 2027 ("Additional 2027 Notes") in a private offering. The Additional 2024 Notes have terms substantially identical to the Original 2024 Notes and the Additional 2027 Notes have terms substantially identical to the Original 2027 Notes. The Original 2024 Notes and the Additional 2024 Notes form a single class of securities ("2024 Notes"), and the Original 2027 Notes and the Additional 2027 Notes form a single class of securities ("2027 Notes"). The Company received proceeds of $416.1 million, net of underwriting costs of $4.4 million. The Original 2024 Notes and the Additional 2024 Notes are referred to as the 2024 Notes and the Original 2027 Notes and the Additional 2027 Notes are referred to as the 2027 Notes. On January 8, 2018, the Note Issuers completed an exchange offer with respect to the 2024 Notes and the 2027 Notes and all validly tendered 2024 Notes and 2027 Notes were exchanged for notes registered with the SEC.
The 2024 Notes and 2027 Notes are senior unsecured obligations of the Note Issuers, which rank equally in right of payment with all existing and future unsecured senior indebtedness of the Note Issuers. The 2024 Notes and 2027 Notes are effectively subordinated in right of payment to any secured indebtedness of the Note Issuers to the extent of the value of the assets securing such indebtedness. The senior notes are guaranteed on a joint and several basis by the Company, the General Partner and all of CyrusOne LP’s existing domestic subsidiaries that guarantee the $3.0 Billion Credit Facility. Each of CyrusOne LP’s restricted subsidiaries (other than any designated excluded subsidiary or receivables entity) that guarantees any other indebtedness of CyrusOne LP or other indebtedness of the guarantors will be required to guarantee the senior notes in the future. Each such guarantee is a senior unsecured obligation of the applicable guarantor, ranking equally with all existing and future unsecured senior indebtedness of such guarantor and effectively subordinated to all existing and future secured indebtedness of such guarantor to the extent of the value of the assets securing that indebtedness. The 2024 Notes and 2027 Notes are structurally subordinated to all liabilities (including trade payables) of each subsidiary of CyrusOne LP that does not guarantee the 2024 Notes and 2027 Notes.
The 2024 Notes and 2027 Notes may be redeemed at our option prior to their scheduled maturity dates at the prices and premiums and on the terms set forth in the respective indentures governing the notes.
Our debt agreements contain customary provisions with respect to events of default, affirmative and negative covenants and borrowing conditions. The most restrictive covenants are generally included in the $3.0 Billion Credit Agreement. The $3.0 Billion Credit Agreement requires us to maintain certain financial covenants including the following, in each case on a consolidated basis, a minimum fixed charge ratio, maximum total and secured leverage ratios, a minimum tangible net worth requirement, a maximum secured recourse indebtedness ratio, a minimum unencumbered debt yield ratio and a maximum ratio of unsecured indebtedness to unencumbered asset value. In order to continue to have access to amounts available under the $3.0 Billion Credit Agreement,

23

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


the Company must remain in compliance with all of that agreement's covenants. As of March 31, 2019, we believe we are in compliance with all provisions of our debt agreements.

10. Fair Value of Financial Instruments and Hedging Activities

Fair value measurements are based on the assumptions that market participants would use in pricing the asset or liability. As a basis for considering assumptions in fair value measurements, a fair value hierarchy that distinguishes between market participant assumptions based on market data obtained from sources independent of the reporting entity (observable inputs that are classified within Levels 1 and 2 of the hierarchy) and the reporting entity's own assumptions about market participant assumptions (unobservable inputs classified within Level 3 of the hierarchy) has been established. 

Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets and liabilities that we have the ability to access. Level 2 inputs are inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs may include quoted prices for similar assets and liabilities in active markets, as well as inputs that are observable for the asset or liability (other than quoted prices), such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability that are typically based on an entity's own assumptions, as there is little, if any, related market activity. In instances where the determination of the fair value measurement is based on inputs from different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement falls is based on the lowest level input that is significant to the fair value measurement in its entirety. Our assessment of the significance of a particular input to the fair value measurement requires judgment and considers factors specific to the asset or liability.
The fair value of cash and cash equivalents, rent and other receivables, construction costs payable, dividends payable and accounts payable and accrued expenses approximate their carrying value because of the short-term nature of these financial instruments. The carrying value, exclusive of deferred financing costs, for the revolving credit facilities and the floating rate term loans approximate estimated fair value as of March 31, 2019 and December 31, 2018, due to the floating rate nature of the interest rates and the stability of our credit ratings.
The carrying value and fair value of other financial instruments are as follows (in millions):
 
March 31, 2019
December 31, 2018
 
Carrying Value
Fair Value
Carrying Value
Fair Value
2024 Notes
$
705.2

$
720.1

$
705.5

$
684.1

2027 Notes
508.8

515.0

509.1

488.0

GDS Equity investment
286.7

286.7

185.5

185.5

The fair values of our 2024 Notes and 2027 Notes as of March 31, 2019 were based on the quoted market prices for these notes, which is considered Level 1 of the fair value hierarchy. The fair value of the equity investment as of March 31, 2019 was based on the quoted market price for the stock which is considered Level 1 of the fair value hierarchy.
Hedging Activities

When we use derivative instruments, it is generally to reduce our exposure to fluctuations in interest rates and foreign currency exchange rate movements. We have not entered into, and do not plan to enter into, financial instruments for trading or speculative purposes. To manage foreign currency exposure, we have entered into Euro denominated debt and cross-currency swap to hedge the Company's net investment in its Euro functional currency consolidated subsidiaries and the variability in EUR-USD exchange rate.

Accounting for changes in the fair value of derivatives depends on the intended use of the derivative and the designation of the derivative, including whether we have elected to designate a derivative in a hedging relationship and apply hedge accounting and whether the hedging relationship has satisfied the criteria necessary to apply hedge accounting. Derivatives designated and qualifying as a hedge of the exposure to changes in the fair value of an asset, liability, or firm commitment attributable to a particular risk, such as foreign currency risk or interest rate risk, are considered fair value hedges. Derivatives designated and qualifying as a hedge of the exposure to variability in expected future cash flows, or other types of forecasted transactions, are considered cash flow hedges. Hedge accounting generally provides for the matching of the timing of gain or loss recognition on the hedging instrument with the recognition of the changes in the fair value of the hedged asset or liability that are attributable to the hedged risk in a fair value hedge or the earnings effect of the hedged forecasted transactions in a cash flow hedge.

24

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions dollars, except per share)



For derivatives designated as "cash flow" hedges, the change in the fair value of the derivative is initially reported in "Other comprehensive income" ("OCI") in our consolidated statements of comprehensive income (loss) and subsequently reclassified into gain (loss) when the hedged transaction affects earnings, or the hedging relationship is no longer highly effective. We assess the effectiveness of each hedging relationship whenever financial statements are issued, or earnings are reported and at least every three months.

During March 2019, the Company entered into a cross-currency swap whereby the Company pays floating interest on €238.1 million and receives floating interest rate on $270.0 million (a "pay-floating, receive-floating interest rate swap") to hedge the variability of future cash flows attributable to changes in the 1-month USD LIBOR versus EUR LIBOR rates. The pay-floating, receive-floating interest rate swap has an effective date of March 2019 and a maturity date of December 2019 and is recognized in earnings. This interest rate swap effectively convert $270.0 million to €238.1 million debt floating based on the Eur-Euribor rate. As of March 31, 2019, we had borrowings subject to this pay-floating, receive-floating interest rate swaps with aggregate principal balances of approximately $270.0 million.

Net Investment Hedges

In addition to the $270.0 million borrowings subject to a cross-currency swap discussed above we have $130.0 million included in our $415.8 million outstanding on our unsecured $1.7 Billion Revolving Credit Facility, see Note 9. "Debt" as of March 31, 2019. These borrowings are designated as, and are effective as, economic hedges of our net investments in foreign entities. Exchange rate variations impact our financial results because the financial results of our foreign subsidiaries are translated to U.S. dollars each period, with the effect of exchange rate variations being recorded in OCI as part of the cumulative foreign currency translation adjustment. As a result, changes in the value of our borrowings under the Euro-denominated revolver under our $1.7 Billion Revolving Credit Facility and synthetically swapped debt will be reported in the same manner as foreign currency translation adjustments, which are recorded in OCI as part of the cumulative foreign currency translation adjustment.

The following table presents the effect of our derivative financial instruments on our accompanying consolidated financial statements (in millions):
 
For the Three Months Ended March 31,
 
2019
2018
Derivatives in Cash Flow Hedging Relationships
 
 
Cross-Currency Swaps:
 
 
Amount of gain (loss) recognized in OCI for derivatives
$
2.7

$

Amount of gain (loss) reclassified from accumulated OCI for derivatives
$

$

Amount of gain (loss) recognized in earnings
$

$


During the next 12 months, we estimate that no amounts will be reclassified from "Accumulated OCI" to net income (loss).

11. Stockholders' Equity

Capitalization

During the first quarter of 2018, the Board authorized the Company to enter 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 $500.0 million (the "2018 ATM Stock Offering Program"). During the fourth quarter of 2018, the Board authorized the Company to enter 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 "New 2018 ATM Stock Offering Program"). The New 2018 ATM Stock Offering Program replaced the 2018 ATM Stock Offering Program. For the three months ended March 31, 2019, the Company sold approximately 2.0 million shares of its common stock under its ATM stock offering programs at an average price of $52.19, generating net proceeds of approximately $104.1 million after giving effect to sales agent commissions of $1.3 million. As of March 31, 2019, there was $644.6 million under the New 2018 ATM Stock Offering Program available for future offerings.

During the three months ended March 31, 2018, the Company sold 2.8 million common shares at an average price of $51.24. At March 31, 2019, the Company had approximately 110.3 million common shares outstanding.


25

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Distributions
During each of the three months ended March 31, 2019 and 2018, regular dividends were paid to our stockholders of $0.46 per common share. On May 1, 2019, the Company will announce a cash dividend of $0.46 per common share payable on July 12, 2019, to stockholders of record at the close of business on June 28, 2019.
Stock Plans

The board of directors of CyrusOne Inc. adopted the 2012 Long-Term Incentive Plan ("LTIP"), prior to the IPO, which was amended and restated on May 2, 2016. The LTIP is administered by the compensation committee of the board of directors. Awards issuable under the LTIP include common stock, restricted stock, restricted stock units, stock options and other incentive awards. CyrusOne Inc. has reserved a total of 8.9 million shares of CyrusOne Inc. common stock for issuance pursuant to the LTIP, which may be adjusted for changes in capitalization and certain corporate transactions. To the extent that an award, if forfeitable, expires, terminates or lapses, or an award is otherwise settled in cash without the delivery of shares of common stock to the participant, then any unpaid shares subject to the award will be available for future grant or issuance under the LTIP. The payment of dividend equivalents in cash in conjunction with any outstanding awards will not be counted against the shares available for issuance under the LTIP. The related stock compensation expense incurred by CyrusOne Inc. is allocated to the operating partnership. Shares available under the LTIP at March 31, 2019, were approximately 4.5 million. Shares vest according to each award agreement and as long as the employee remains employed with the Company. The Company has granted awards with time-based vesting, performance-based vesting and market-based vesting features.

Restricted stock units and restricted stock are issued as either time-based (where the award vests ratably over time and is not subject to future performance targets and, accordingly, is initially recorded at the current market price at the time of grant) or performance-based (where the award is recorded at fair value at the time of grant and vesting of the award, if any, is based on achieving certain financial targets, currently based on shareholder return). The restricted stock units have the right to receive dividend equivalents in cash and holders of restricted stock have the right to receive dividends. The performance-based awards accrue dividends that are payable upon settlement of the award.

Expense for time-based grants is recognized under a straight-line method. For grants with a market condition, which is generally a factor outside of the Company's financial performance, such as a market index, expense is recognized under a graded expense attribution method. For grants based solely on the Company's financial performance, expense is recognized under a graded expense attribution method if it is probable that the performance targets will be achieved.

Total stock-based compensation expense for the three months ended March 31, 2019 and 2018 was $4.5 million and $3.9 million, respectively.

The following tables present the stock plan activity for the three months ended March 31, 2019 and 2018 for restricted stock units, restricted stock and stock options (performance-based awards are reflected at the target amount of the grant):

Restricted Stock Units ("RSU")
 
2019
2018
 
Units
Weighted Average Grant Date Fair Value
Units
Weighted Average Grant Date Fair Value
Outstanding January 1,
511,049

$
56.23

265,002

$
56.08

Granted
360,362

47.97

322,063

51.92

Exercised
(123,159
)
44.87

(80,965
)
43.47

Forfeited
(2,691
)
49.69

(3,131
)
51.20

Outstanding March 31,
745,561

$
54.14

502,969

$
55.47

 
 
 
 
 
Time-based RSUs outstanding
359,400

$
53.12

256,609

$
50.71

Performance-based RSUs outstanding
386,161

$
55.08

246,360

$
60.41








26

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Restricted Stock ("RS")
 
2019
2018
 
Shares
Weighted Average Grant Date Fair Value
Shares
Weighted Average Grant Date Fair Value
Outstanding January 1,
419,356

$
35.73

715,098

$
32.21

Granted
16,681

52.46

17,052

51.31

Exercised
(364,822
)
35.23

(209,415
)
27.02

Forfeited
(34,603
)
37.09

(44,034
)
28.45

Outstanding March 31,
36,612

$
47.02

478,701

$
35.50

 
 
 
 
 
Time-based RSs outstanding
36,612

$
47.02

362,084

$
38.08

Performance-based RSs outstanding

$

116,617

$
28.57


Stock Options
 
2019
2018
 
Options
Weighted Average Exercise Price
Options
Weighted Average Exercise Price
Outstanding January 1,
401,223

$
31.96

415,459

$
31.67

Granted




Exercised
(25,586
)
36.70



Forfeited




Outstanding March 31,
375,637

$
31.63

415,459

$
31.67

 
 
 
 
 
Time-based stock options outstanding
323,101

$
32.94

348,137

$
33.23

Performance-based stock options outstanding
52,536

$
23.58

67,322

$
23.58



27

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


12. Income (Loss) per Share

Basic income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period. In addition, net income (loss) applicable to participating securities and the participating securities are both excluded from the computation of basic income (loss) per share.

Diluted income (loss) per share is calculated using the weighted average number of shares of common stock outstanding during the period, including restricted stock outstanding. If there is net income during the period, the dilutive impact of common stock equivalents outstanding would also be reflected.

The following table reflects the computation of basic and diluted net income per share for the three months ended March 31, 2019 and 2018:
IN MILLIONS, except per share amounts
 
 
 
 
Three months ended March 31,
 
2019
 
2018
 
Basic
Diluted
 
Basic
Diluted
Numerator:
 
 
 
 
 
Net income
$
89.4

$
89.4

 
$
43.5

$
43.5

Less: Restricted stock dividends
(0.2
)
(0.2
)
 
(0.3
)
(0.3
)
Net income available to stockholders
$
89.2

$
89.2

 
$
43.2

$
43.2

Denominator:
 
 
 
 
 
Weighted average shares outstanding-basic
108.3

108.3

 
96.0

96.0

Performance-based restricted stock and units
 
0.5

 
 
0.6

Weighted average shares outstanding-diluted
 
108.8

 
 
96.6

EPS:
 
 
 
 
 
Net income per share-basic
$
0.82

 
 
$
0.45

 
Effect of dilutive shares:
 
 
 
 
 
Net income per share-diluted
 
$
0.82

 
 
$
0.45


13. Related Party Transactions

The Company has a strategic partnership with GDS, a developer and operator of high-performance, large-scale data centers in China. In connection with our investment in GDS, the Company entered into an agreement with GDS for the joint marketing of each company's data centers. Also as a part of the agreement, the Company's Chief Executive Officer joined the board of directors of GDS on June 22, 2018.

For the three months ended March 31, 2019, the Company incurred $0.5 million of commission and referral charges and accrued expenses payable to GDS. The commission and referral charges were capitalized as deferred leasing costs and will be amortized over the terms of the respective customer leases. The Company has not recognized any referral revenue related to the agreement with GDS in 2019 or 2018. See Note 7. "Equity Investments" for additional information related to our GDS investment.

The Company has a 10% equity interest in ODATA, a Brazilian headquartered company that specializes in providing colocation services to wholesale customers, such as hyperscale cloud providers, financial services and telecommunications companies, and also to enterprises across multiple industries. In connection with these investments, CyrusOne and ODATA entered a commercial agreement covering leasing activity with CyrusOne customers in the ODATA portfolio. Also as a part of the agreement, the Company's Chief Technology Officer joined the ODATA board of directors in October 2018. See Note 7. "Equity Investments" for additional information related to our ODATA investment.

14. Income Taxes
CyrusOne Inc. elected to be taxed as a REIT under the Internal Revenue Code of 1986, as amended (the "Code"), commencing with its taxable year ended December 31, 2013. To remain qualified as a REIT, the Company is required to distribute at least 90% of its taxable income to its stockholders and meet various other requirements imposed by the Code relating to such matters as operating results, asset holdings, distribution levels and diversity of stock ownership. Provided the Company continues to qualify for taxation as a REIT, the Company is generally not subject to corporate level federal income tax on the earnings distributed currently to its stockholders. It is the Company's policy and intent, subject to change, to distribute 100% of its taxable income and therefore no provision is required in the accompanying financial statements for federal income taxes with regards to activities of CyrusOne Inc. and its subsidiary pass-through entities.
The REIT and certain of its subsidiaries are subject to state and local income taxes, franchise taxes, and gross receipts taxes. The Company has elected to treat certain of its subsidiaries as taxable REIT subsidiaries ("TRSs"). The Company's TRSs are subject to U.S. federal, state and local corporate income taxes. The Company's foreign subsidiaries are subject to corporate income taxes in the jurisdictions in which they operate.
15. Commitments and Contingencies

As of March 31, 2019, the Company had outstanding letters of credit of $8.0 million as security for obligations under the terms of its lessee agreements.

The Company has entered into non-cancellable contracted commitments for construction of data center facilities and acquisition of equipment. As of March 31, 2019, these commitments were approximately $272.7 million and are expected to be incurred over the next one to two years. In addition, the Company has entered into equipment and utility power contracts, which require minimum

28

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


purchase commitments for power. These agreements range from one to two years and provide for payments for early termination or require minimum payments for the remaining term. As of March 31, 2019, the minimum commitments for these arrangements were approximately $51.0 million.

During the normal course of business, the Company and its subsidiaries have made certain indemnities and commitments to customers, vendors and associated parties related to the use, protection and security of intellectual property and claims for negligence or willful misconduct. Further, customer contracts generally require specified levels of performance related to uninterrupted service and cooling temperatures. Also in the normal course of our business, the Company is involved in legal, tax and regulatory proceedings arising from the conduct of its business activities. Management assesses the probability that these performance standards, credits, claims or indemnities have been incurred and liabilities or asset reserves are established for loss contingencies when the losses associated are deemed to be probable and the loss can be reasonably estimated. Based on information currently available, the Company believes that the outcome of such matters will not, individually or in the aggregate, have a material effect on its consolidated financial statements.

16. Guarantors

The 2024 Notes and 2027 Notes issued by CyrusOne LP (the "LP Co-Issuer") and CyrusOne 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. The guarantors include CyrusOne Inc. (the "Parent Guarantor"), the General Partner and certain domestic wholly-owned subsidiaries of the Operating Partnership (together with the General Partner, the "Guarantor Subsidiaries"; the Guarantor Subsidiaries together with the Parent Guarantor, the "Guarantors"). As of March 31, 2019 and 2018, non-guarantors are all of the Company's foreign subsidiaries and certain domestic subsidiaries (collectively, the "Non-Guarantors"). The foreign subsidiaries the Company acquired upon its acquisition of Zenium are classified as Non-Guarantors.

The indentures governing the 2024 Notes and 2027 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; pay dividends or distributions on its equity interests, or redeem or repurchase equity interests of the Company; make certain investments or other restricted payments; enter into transactions with affiliates; enter into agreements limiting the ability of the Operating Partnership's subsidiaries to pay dividends or make certain transfers and other payments to the Operating Partnership or to other subsidiaries; sell assets; and merge, consolidate or transfer all or substantially all of the operating partnership's assets. 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 indenture. Notwithstanding the foregoing, the covenants contained in the indentures do not restrict the Company's ability to pay dividends or distributions to stockholders to the extent (i) no default or event of default exists or is continuing under the indentures and (ii) the Company believes in good faith that it qualifies as a REIT under the Code and the payment of such dividend or distribution is necessary either to maintain its status as a REIT or to enable it to avoid payment of any tax that could be avoided by reason of such dividend or distribution. Subject to the provisions of the indentures governing the 2024 Notes and 2027 Notes, in certain circumstances, a Guarantor may be released from its guarantee obligation, including:

upon the sale or other disposition (including by way of consolidation or merger) of such Guarantor or of all of the capital stock of such Guarantor such that such Guarantor is no longer a restricted subsidiary under the indentures,
upon the sale or disposition of all or substantially all of the assets of the Guarantor,
upon the LP Co-issuer designating such Guarantor as an unrestricted subsidiary under the terms of the indentures,
if such Guarantor is no longer a guarantor or other obligor of any other indebtedness of the LP Co-issuer or the Parent Guarantor,
upon the LP Co-issuer designating such Guarantor as an excluded subsidiary under the terms of the indentures,
upon the defeasance or discharge of the 2024 Notes or 2027 Notes, as applicable, in accordance with the terms of the indentures, and

29

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


upon the 2024 Notes or 2027 Notes, as applicable, being rated investment grade by at least two rating agencies and no default or event of default shall have occurred and be continuing.

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. The Guarantor Subsidiaries include substantially all of the Company's domestic operations and include approximately 85% of its gross operating real estate. The Non-Guarantors include substantially all of the Company's foreign operations, primarily in the United Kingdom, Germany and Singapore. The Non-Guarantors' assets also include the ownership of the Company's equity investment in GDS of $286.7 million and $185.5 million as of March 31, 2019 and December 31, 2018, respectively.

The following schedules present the condensed consolidating balance sheets as of March 31, 2019 and December 31, 2018, and the condensed consolidating statements of operations, comprehensive income (loss) and the statements of cash flows for the three months ended March 31, 2019 and 2018 for the Parent Guarantor, General Partner, each Co-Issuer, Guarantor Subsidiaries, and Non-Guarantors. Eliminations and consolidation adjustments primarily relate to the elimination of investments in subsidiaries and equity earnings (loss) related to investments in subsidiaries (in millions).

30

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Condensed Consolidating Balance Sheets
 
As of March 31, 2019
 
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor Subsidiaries
Non-
Guarantors
Eliminations/Consolidations
Total
Total investment in real estate, net
$

$

$

$

$
3,680.6

$
659.6

$
46.1

$
4,386.3

Cash and cash equivalents




106.9

19.1


126.0

Investment in subsidiaries
2,368.2

18.9

3,352.6




(5,739.7
)

Rent and other receivables


0.3


229.5

18.9


248.7

Restricted cash





1.3


1.3

Operating lease right-of-use assets




45.2

38.6


83.8

Intercompany receivable
15.2


1,930.6


8.8


(1,954.6
)

Equity investments





299.3


299.3

Goodwill




455.1



455.1

Intangible assets, net




172.3

53.8


226.1

Other assets


3.2


99.0

12.6


114.8

Total assets
$
2,383.4

$
18.9

$
5,286.7

$

$
4,797.4

$
1,103.2

$
(7,648.2
)
$
5,941.4

Debt
$

$

$
2,898.6

$

$

$

$

$
2,898.6

Intercompany payable


15.2


1,930.6

8.8

(1,954.6
)

Finance lease liabilities




5.6

27.8


33.4

Operating lease liabilities




79.8

39.8


119.6

Construction costs payable




122.4

33.1


155.5

Accounts payable and accrued expenses


4.7


73.1

3.8


81.6

Dividends payable
51.5







51.5

Deferred revenue and prepaid rents




152.1

3.8


155.9

Deferred tax liability





67.2


67.2

Total liabilities
51.5


2,918.5


2,363.6

184.3

(1,954.6
)
3,563.3

Total stockholders' equity
2,331.9

18.9

2,368.2


2,433.8

918.9

(5,693.6
)
2,378.1

Total liabilities and equity
$
2,383.4

$
18.9

$
5,286.7

$

$
4,797.4

$
1,103.2

$
(7,648.2
)
$
5,941.4




31

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


 
As of December 31, 2018
 
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor Subsidiaries
Non-
Guarantors
Eliminations/Consolidations
Total
Total investment in real estate, net
$

$

$

$

$
3,611.2

$
644.9

$
36.9

$
4,293.0

Cash and cash equivalents




27.2

37.2


64.4

Investment in subsidiaries
2,216.9

22.2

3,122.5




(5,361.6
)

Rent and other receivables




218.7

16.2


234.9

Intercompany receivable
23.2


1,761.5


6.8


(1,791.5
)

Equity investments





198.1


198.1

Goodwill




455.1



455.1

Intangible assets, net




178.1

57.6


235.7

Other assets


0.5


94.4

16.4


111.3

Total assets
$
2,240.1

$
22.2

$
4,884.5

$

$
4,591.5

$
970.4

$
(7,116.2
)
$
5,592.5

Debt
$

$

$
2,624.7

$

$

$

$

$
2,624.7

Intercompany payable


23.2


1,761.5

6.8

(1,791.5
)

Finance lease liabilities




104.0

52.7


156.7

Construction costs payable




175.6

19.7


195.3

Accounts payable and accrued expenses


19.7


95.9

5.7


121.3

Dividends payable
51.0







51.0

Deferred revenue and prepaid rents




144.9

3.7


148.6

Deferred tax liability





68.9


68.9

Total liabilities
51.0


2,667.6


2,281.9

157.5

(1,791.5
)
3,366.5

Total stockholders' equity
2,189.1

22.2

2,216.9


2,309.6

812.9

(5,324.7
)
2,226.0

Total liabilities and equity
$
2,240.1

$
22.2

$
4,884.5

$

$
4,591.5

$
970.4

$
(7,116.2
)
$
5,592.5



32

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Condensed Consolidating Statements of Operations and Comprehensive Income (Loss)
 
Three Months Ended March 31, 2019
 
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor Subsidiaries
Non-
Guarantors
Eliminations/ Consolidations
Total
Revenue
$

$

$

$

$
209.2

$
15.8

$

$
225.0

Total operating expenses




189.3

23.9


213.2

Operating income




19.9

(8.1
)

11.8

Interest expense


(32.5
)


(0.4
)
9.2

(23.7
)
Unrealized gain on marketable equity investment





101.2


101.2

Other expense





(0.1
)

(0.1
)
(Loss) income before income taxes


(32.5
)

19.9

92.6

9.2

89.2

Income tax (expense) benefit




(0.8
)
1.0


0.2

Equity earnings (loss) related to investment in subsidiaries
83.5

0.8

113.3




(197.6
)

Net income (loss)
83.5

0.8

80.8


19.1

93.6

(188.4
)
89.4

Other comprehensive income


2.7



0.6


3.3

Comprehensive income (loss)
$
83.5

$
0.8

$
83.5

$

$
19.1

$
94.2

$
(188.4
)
$
92.7



 
Three Months Ended March 31, 2018
 
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor Subsidiaries
Non-
Guarantors
Eliminations/Consolidations
Total
Revenue
$

$

$

$

$
194.9

$
1.7

$

$
196.6

Total operating expenses




167.6

1.3


168.9

Operating income




27.3

0.4


27.7

Interest expense


(23.9
)


(0.7
)
3.8

(20.8
)
Unrealized gain on marketable equity investment





40.5


40.5

Loss on early extinguishment of debt


(3.1
)




(3.1
)
Net (loss) income before income taxes


(27.0
)

27.3

40.2

3.8

44.3

Income tax expense




(0.8
)


(0.8
)
Equity earnings (loss) related to investment in subsidiaries
39.8

0.4

66.8




(107.0
)

Net income (loss)
39.8

0.4

39.8


26.5

40.2

(103.2
)
43.5

Other comprehensive income





0.1


0.1

Comprehensive income (loss)
$
39.8

$
0.4

$
39.8

$

$
26.5

$
40.3

$
(103.2
)
$
43.6























33

CyrusOne Inc.
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS - (unaudited)
(in millions of dollars, except per share)


Condensed Consolidating Statements of Cash Flows
 
Three Months Ended March 31, 2019
 
Parent
Guarantor
General
Partner
LP
Co-issuer
Finance
Co-issuer
Guarantor Subsidiaries
Non-
Guarantors
Eliminations/Consolidations
Total
Net cash (used in) provided by operating activities
$

$

$
(46.5
)
$

$
79.9

$
1.3

$
9.2

$
43.9

Cash flows from investing activities:
 
 
 
 
 
 
 
 
Investment in real estate




(258.6
)
(34.1
)
(9.2
)
(301.9
)
Investment in subsidiaries
(105.0
)
(0.8
)
(106.0
)



211.8


Return of investment
50.4






(50.4
)

Intercompany borrowings
8.7


(169.1
)

(2.0
)

162.4


Net cash (used in) provided by investing activities
(45.9
)
(0.8
)
(275.1
)

(260.6
)
(34.1
)
314.6

(301.9
)
Cash flows from financing activities:
 
 
 
 
 
 
 
 
Issuance of common stock, net
105.0







105.0

Dividends paid
(50.4
)

(50.4
)



50.4

(50.4
)
Intercompany borrowings


(8.7
)

169.1

2.0

(162.4
)

Proceeds from revolving credit facility


275.7





275.7

Payments on finance lease liabilities




(0.3
)
(0.3
)

(0.6
)
Tax payment upon exercise of equity awards
(8.7
)






(8.7
)
Contributions/distributions from parent

0.8

105.0


91.6