Colony Capital’s review of digital infrastructure in 2020 is promising, and the company has its outlook set for 2021, as it continues its pivot towards digital. Specifically, Colony Capital’s major themes for digital infrastructure in 2021 are having a deep pipeline of investment opportunities, strong customer relationships, and continuing to form further investment capital, which will build on its capital raising success during 2020.
Below we detail key updates on Colony Capital’s portfolio from 2020 and the company’s outlook for digital infrastructure in 2021. Specifically, Colony Capital views digital infrastructure as the combination of towers, data centers, fiber, small cells, and distributed antenna systems. Furthermore, the company now operates in four major geographic regions globally, including North America, Europe, Latin America, and Asia.
North America – 2020 Review and 2021 Outlook
Vertical Bridge is Colony Capital’s investment vehicle for U.S. towers. Indeed, Vertical Bridge is the fourth largest owner of towers in the United States, with a portfolio of 20k owned towers following its merger with Eco-Site.
In 2020, Vertical Bridge’s operating performance was good, but not great, as expectations entering 2020 were quite high. Specifically, Colony Capital anticipated that Vertical Bridge would achieve 10%+ gross organic revenue growth for the year. However, gross organic revenue growth for 2020 came in modestly lower, at 8% to 9% for the year.
Nevertheless, Vertical Bridge’s gross organic revenue growth rates remain industry leading, when compared to its three publicly-traded tower peers. As a reference point, for the nine months ended September 2020:
- American Tower’s U.S. gross organic revenue growth was 6.8%
- Crown Castle’s U.S. gross organic revenue growth was 6.3%
- SBA Communications’ U.S. gross organic revenue growth was 6.7%
In terms of tenant churn, Vertical Bridge had only very small amounts of churn in 2020. Indeed, Vertical Bridge’s average tower age is only ~7 years, which shields the company from the legacy tenant churn that its public tower company peers are facing. Specifically, Vertical Bridge does not have exposure to Sprint, which has, and will continue to elevate churn rates at American Tower.
As a result, during 2020, Vertical Bridge was able to outperform its three publicly-traded tower peers in terms of churn as well. As a reference point, for the nine months ended September 2020:
- American Tower had U.S. churn of 2.0%
- Crown Castle had U.S. churn of 2.4%
- SBA Communications had U.S. churn of 2.3%
Outlook and Catalysts for Colony Capital’s Towers in 2021
Upon review, some of Colony Capital’s expected organic revenue growth for U.S. towers for 2020, has been deferred to 2021. Indeed, key incremental catalysts for Colony Capital’s 2021 organic revenue growth outlook include:
- T-Mobile’s acceleration of capital expenditures for its 2.5 GHz mid-band 5G network build-out
- DISH Network’s greenfield 5G network deployments, which may start in late 2021
- C-band spectrum (i.e., 3.7 GHz to 3.98 GHz range) deployments from Verizon and AT&T
However, Colony Capital is tempering its organic revenue growth rate outlook for towers in 2021. In reality, DISH Network may not have meaningful tower deployments until 2022. Additionally, the expensive C-band auction may hinder Verizon and AT&T’s ability to make significant network capital expenditures in 2021.
Colony Capital views the data center sector as having five key sub-sectors to offer customers. Specifically, these include hyperscale, edge, retail, interconnection, and managed services.
Vantage Data Centers (North America) is Colony Capital’s investment platform for U.S. hyperscale data center assets. Indeed, Vantage Data Centers owns 13 operating hyperscale campuses and has 4 which are currently under development. Colony Capital has the ambition to build Vantage Data Centers (including Vantage Europe) into the largest hyperscale data center provider in the world.
In 2020, Vantage Data Centers had a very strong year, achieving 10%+ organic revenue growth for the year. Vantage Data Centers was ahead of budget for 2020 and had a particularly strong Q4 2020, in terms of leasing. Specifically, Vantage had a number of leasing wins, in its key data center markets. Notably, Vantage signed an 8 megawatt lease with ByteDance (owner of TikTok) in Northern Virginia and a 12 megawatt lease with Microsoft in Santa Clara, California during the year.
In contrast to Vantage, Colony Capital stipulates that the publicly-traded hyperscale data center providers (e.g., Digital Realty, CyrusOne, and QTS) had mixed results. Indeed, some of these providers achieved their forecasted bookings for Q4 2020, whereas others did not.
Northern Virginia – Ashburn
In Northern Virginia, and specifically Ashburn, Vantage Data Centers performed fine in 2020. Indeed, the company was able to secure two very competitive leases in Q4 2020.
Overall, Northern Virginia is an extraordinarily competitive market with a lot of data center providers having entered the market, with access to private capital. For example, data center providers including CloudHQ, Compass Datacenters, EdgeCore, Sabey Data Centers, and STACK Infrastructure all have a presence in Northern Virginia. Many of these data center providers have underpriced their lease rates, on price per megawatt basis, in order to win new business. Indeed, Colony Capital notes that this has caused some market friction in Northern Virginia, pressuring investment returns.
Colony Capital does not like the investment returns available in Ashburn and prefers to focus its efforts elsewhere. Specifically, Colony Capital originally underwrote development yields in Ashburn to a 16% IRR. However, as the competitiveness of the market has increased, returns have been adjusted down to a 14% IRR. Nevertheless, Northern Virginia is a market that data center providers need to have a presence in and thus Vantage will keep building new capacity in the market.
Edge and Interconnection
Following the closing of zColo, DataBank operates 64 data centers, representing 138 megawatts of power capacity. Collectively, these data centers comprise 1.2 million sqft, in the United States and Europe, supporting over 3k customers. Indeed, DataBank currently generates annual revenue of over $450m and EBITDA of over $150m.
In terms of operations, DataBank had another very solid year in 2020, with positive organic growth. Furthermore, DataBank has built a significant leasing pipeline with potential activity from many new relationships. Indeed, for 2021, Colony Capital is pushing DataBank’s outlook towards 10%+ organic revenue growth.
DataBank’s edge computing is well positioned to take advantage of the evolving network architecture towards a decentralized RAN. Indeed, C-RAN (known as cloud-RAN or centralized-RAN) and Open RAN (O-RAN) hubs, bring mobile base stations adjacent to compute and applications. Specifically, this C-RAN and O-RAN hosting is taking place at DataBank’s edge data centers.
DataBank’s investment in EdgePresence during 2020 was critical to becoming a leader in the micro edge data center space. Indeed, two other key micro edge data center companies include EdgeMicro and Vapor IO (owned by Crown Castle). Furthermore, tower companies American Tower and SBA Communications have also made investments in the micro edge sector, by purchasing colocation facilities in Atlanta and Jacksonville, respectively.
EdgePresence has had initial success with good rents and returns from customers colocating in their micro edge facilities. Indeed, two of EdgePresence’s micro edge data centers have more than three customers in them.
To-date Colony Capital has deployed 9 edge facilities across its entire portfolio of digital infrastructure. Indeed, Colony Capital’s outlook is to deploy a further 12 to 20 edge facilities during 2021. Albeit small at the moment, Colony Capital’s time horizon for the micro edge data center business is to grow over the next 5 years and beyond.
With the combination of zColo, DataBank is developing a rich interconnection ecosystem and becoming an important interconnection provider across the United States. Indeed, DataBank now has 30k network cross connects and 18 major network interconnection points. Importantly, DataBank is also able to bring that connectivity to Colony Capital’s portfolio companies which focus on towers and small cells (i.e., Vertical Bridge and ExteNet). In turn, this makes DataBank’s offering a differentiated value proposition.
Managed IT Services (including Hybrid Cloud)
During 2020, managed IT services, as a data center sub-sector, had the lowest growth rate as compared to all other key data center sub-sectors. Indeed, Colony Capital portfolio company, Aptum Technologies, which is a managed IT services provider had only a small amount of positive organic growth. Upon review, Colony Capital notes that 2020 was a good year in terms of new bookings for Aptum Technologies. However, the company also had a reasonable amount of churn, so the year could have been better.
Fiber is a critical piece of Colony Capital’s digital infrastructure portfolio in North America, with Zayo being the most prominent portfolio company. Indeed, Zayo has a network spanning over 133k fiber route miles and 13.2 million fiber strand miles.
Upon review, Colony Capital notes that 2020 was a great year for Zayo. However, each quarter was distinct in terms of performance. Firstly, Q1 2020 performance was robust, with Zayo achieving net organic revenue growth of 9%. Secondly, Q2 2020 had a slower growth rate. Thirdly, Q3 2020 was disappointing in terms of growth, with more churn than bookings. Finally, the company had positive organic growth in Q4 2020.
Heading into 2021, Zayo’s sales backlog continues to build and it now has its largest sales backlog in company history. Indeed, this gives Colony Capital an optimistic outlook for Zayo in 2021.
Separately in fiber, another Colony Capital portfolio company, Beanfield Metroconnect also had a strong year. Indeed, Beanfield Metroconnect which operates in Canada, had 10%+ organic revenue growth for the year. Specifically, the company focuses on metro (or intra-city) fiber networks, providing optical fiber that runs, within both the Toronto and Montreal markets.
Small Cells & DAS
ExteNet is the portfolio through which Colony Capital gets exposure to small cells and distributed antenna systems (DAS). Indeed, ExteNet owns 32.3k small cell & DAS nodes, 430 networks and 3.6k fiber route miles.
ExteNet had a strong start to 2020, with in Q1 2020 being robust. However, the company’s business was negatively impacted in Q2 2020 and Q3 2020. Specifically, the small cell sector relies on permits which COVID-19 made challenging to receive. Indeed, COVID-19 presented difficulties for municipality personnel to provide approval for these small cell permits.
However, ExteNet had a tremendous Q4 2020, building more nodes in a single quarter than in any other quarter in the company’s history. Moreover, ExteNet secured over $6m in new sales bookings during the quarter, which was also the best quarterly bookings in company history. Indeed, many key customers continued deploying small cells in Q4 2020, including both Verizon and AT&T.
ExteNet is heading into 2021 with a pipeline of ~$63m in new bookings, which is the company’s largest ever pipeline. In 2021, ExteNet has an optimistic outlook that T-Mobile will also increase its small cell activity during the second half 2021. Additionally, ExteNet is hopeful that DISH Network will begin to deploy small cells in late 2021 and 2022.
Europe – 2020 Review and 2021 Outlook
In Europe, 2020 was not a strong year for tower leasing, as wireless carriers were subdued in their capital expenditures for 5G. Additionally, Europe has a significant presence of captive tower companies (e.g., Vantage Towers, owned by Vodafone) that are being created by the wireless carriers.
Captive tower companies are problematic because they make the European tower market function differently than if independent tower companies were prevalent, as they are in the United States. Specifically, captive tower companies achieve growth by building their own towers. Therefore, there is no true third-party lease-up and colocation on captive tower company assets. In turn, this phenomenon is causing Europe to be a difficult market for tower investors like Colony Capital to deploy capital into.
In 2020, Colony Capital gained further skepticism based on its review of the financial projections of the upcoming European public tower vehicles. Specifically, certain wireless carriers (e.g., Vantage Towers by Vodafone), may find it difficult to reach the financial projections they are forecasting to prospective investors.
Finally, Colony Capital’s skepticism on the pricing of European towers, was accentuated by Cellnex’s recent purchase of 24.6k towers from CK Hutchison for €10bn. Indeed, Colony Capital could not reach the €10bn price paid for those assets, based on its underwriting criteria. Specifically, at the €10bn price, which Cellnex paid for the CK Hutchison towers, Colony Capital could only generate an IRR of ~3%, which is well below is investment return expectations.
Overall, because of the difficult investment environment in Europe, Colony Capital has not invested considerably on the continent. Indeed, Digita Oy is Colony Capital’s only European tower investment, which operates ~580 towers in Finland.
Colony Capital’s data center investments in Europe are focused on the hyperscale sub-sector. Specifically, Colony Capital portfolio company, Vantage Europe, owns 1 operating hyperscale campus and has 6 which are currently under development. In 2020, Vantage Europe had 10%+ organic revenue growth, which represented 200% of its budget for the year.
Vantage Europe’s strategy focuses on the “next” largest hyperscale markets like Berlin, Zurich, Milan, Warsaw, and Cardiff. Indeed, Vantage is staying out of the Tier-1 FLAP (Frankfurt, London, Amsterdam, and Paris) data center markets in Europe.
Vantage Europe typically competes with Digital Realty and CyrusOne in Europe. Importantly, in 2020, Vantage Europe won a significant share of leasing deals against these competitors. Specifically, Vantage Europe had notable leasing wins in Berlin, Cardiff, Offenbach (i.e., Frankfurt), and Zurich. As an example, Microsoft was one customer that Vantage Europe signed lease agreements with during 2020.
Fiber and Small Cells
Colony Capital has three companies with a fiber presence in Europe, including Zayo, Freshwave Group, and Digita Oy. Firstly, Zayo operates fiber networks in the UK, France, Germany, Italy, Switzerland, the Netherlands, Belgium, and Ireland. Secondly, Freshwave Group operates 5.0k small cell nodes and 150 networks in the UK. Thirdly, Digita Oy owns more than 600 miles (1,000 kilometers) of fiber in Finland. Upon review, Colony Capital notes that all of these companies performed exceptionally well in Q4 2020.
Upon review, Colony Capital notes that Freshwave Group had its best quarter in company history in Q4 2020. Specifically, this outperformance was driven by trends such as the UK beginning to deploy small cells for 5G purposes.
Latin America – 2020 Review and 2021 Outlook
In Latin America, Colony Capital has three portfolio companies focused on towers, including Andean Tower Partners, Mexico Tower Partners, and Highline do Brasil. Upon review, each of the Latin American countries which Colony Capital has a presence in, had distinct performances during 2020.
Brazil and Colombia were markets where tower leasing was strong, exceeded expectations and ramped up towards the end of 2020. Additionally, in Chile, tower leasing performance was good.
However, in Peru tower leasing expectations were not met, given political uncertainty. Specifically, this related to the ouster of the country’s former president, Martín Vizcarra during 2020. Separately, Mexico tower leasing was below expectations, even on a fairly muted outlook going into the year.
Colony Capital’s Latin American hyperscale data center platform is called Scala Data Centers. Currently, Scala Data Centers is the second-largest hyperscale data center provider in Brazil. Indeed, the company has two operating hyperscale campuses and one currently under development. Once fully built-out Scala Data Centers’ three hyperscale campuses will comprise 50 megawatts of power capacity.
In 2020, Scala Data Centers achieved 10%+ organic revenue growth, exceeding its leasing forecast. Particularly, the company had a strong Q4 2020, with a large hyperscale customer signing in São Paulo, Brazil. For 2021, Scala Data Centers will be competing for further hyperscale leasing deals against Ascenty, which is owned by Digital Realty and Brookfield Infrastructure.
Fiber and Small Cells
Colony Capital’s three Latin American tower companies, Andean Tower Partners, Mexico Tower Partners, and Highline do Brasil, also have a presence in fiber and small cells in the region.
Andean Tower Partners’ strongest market in 2020 was Colombia, which had significant dark fiber leasing. Indeed, the company owns significant dark fiber capacity in Colombia. Specifically, Andean Tower Partners connects its dark fiber to towers, in turn, selling services to wireless carriers in the country. Furthermore, Andean Tower Partners owns metro fiber rings in Colombia, which performed well.
Additionally, Colony is building fiber-to-the-home through Andean Tower Partners and Highline do Brasil. However, in these investments, Colony is entering into long-term, 15-year to 25-year lease agreements with investment-grade customers. Specifically, Colony sells fiber capacity on a wholesale basis to major wireless carriers, in Colombia, Chile and Brazil, after building the network for them.
In terms of small cells, Brazil, Colombia, and Chile had strong leasing performance. Whereas Peru and Mexico had a poor performance, with muted take-up of small cell leasing.
Finally, Mexico Tower Partners has created a unique C-RAN hub business for itself in Mexico. Indeed, during 2020, the company built a series of C-RAN hubs for wireless carriers including ALTÁN Redes, Telefónica, Totalplay, and AT&T. Specifically, these wireless carriers are colocating their mobile base stations in these Open RAN hub architectures. Overall, Colony Capital’s outlook for Mexico Tower Partners is to finish 2021 with 60 to 80 C-RAN hubs built-out across Mexico.
Asia – 2020 Review and 2021 Outlook
Towers and Data Centers
In Q4 2020, Colony Capital entered Asia for the first time, as a new investment market for its digital infrastructure platform. In Asia, Colony Capital is focusing its efforts on the sectors of towers and hyperscale data centers.
Colony Capital has made two investments to-date in Asia. Firstly, AgileDC is a hyperscale data center platform focused on Japan, with sites in both Tokyo and Osaka. Secondly, Edgepoint Infrastructure owns 4k towers in Southeast Asia.
Presently, no operating metrics have been made available for either AgileDC or Edgepoint Infrastructure because Colony closed on both investments in Q4 2020.