Colony Capital is truly embracing the convergence of digital infrastructure. Specifically, the convergence of towers, data centers, fiber, small cells, and distributed antenna systems is becoming increasingly evident. Colony has a clear idea of the direction in which digital infrastructure is trending because it is analyzing each sector, on a daily basis, through its various portfolio companies.
Firstly, through Vertical Bridge, Andean Tower Partners, and Mexico Tower Partners, Colony is witnessing the migration of equipment that is on the tower. Specifically, this takes the form of 5G radios and massive multiple-input, multiple-output (massive MIMO) antennas.
Secondly, through Vantage Data Centers, DataBank and Aptum Technologies, it is evident to Colony that data center providers have to replace retail colocation with edge workloads. Furthermore, data center providers need to understand how to deliver that edge ecosystem to their customers.
Thirdly, through Zayo and Beanfield Metroconnect, Colony is able to see the purchasing behavior of major fiber customers. Specifically, it is particularly telling where the hyperscale customers like Amazon Web Services, Microsoft Azure, and Google Cloud are building their fiber routes to.
Finally, ExteNet is building Cloud / Centralized Radio Access Network (C-RAN) hubs, which gives Colony a view into the evolving 5G network architecture. Specifically, ExteNet provides Colony insight into the progress of Virtualized RAN (vRAN), Open RAN (O-RAN), and Centralized RAN (C-RAN).
Convergence of Digital Infrastructure – Creating New Customers
Understanding the new network architecture and how 5G networks are evolving, is critical to securing customer leases on digital infrastructure. Specifically, asset owners must understand the convergence of towers, data centers, fiber, small cells, and distributed antenna systems.
Networks are evolving, and the way customers are purchasing infrastructure is evolving. Therefore, if digital infrastructure providers do no not adapt and change, they can no longer compete. 5G represents the biggest step function in network topology that has ever occurred. Indeed, 5G is a much more complicated build than past wireless generations of 4G, 3G, and 2G.
Network Architecture – Changes the Data Center Need
Historically, DISH Network has not been a major user of data center capacity, given that its core business is offering pay-TV services under the DISH brand and the Sling brand. In turn, DISH has not been a meaningful customer for the largest data center providers like Equinix and Digital Realty.
However, DISH intends to create a “real” 5G network, powered by 50k tower sites that costs ~$10bn to build. Moreover, DISH is building, from the ground-up, a virtualized network that is O-RAN compliant, which will be tailored to 5G.
Currently, in this evolved O-RAN architecture it is possible to virtualize the core of the network. Therefore, the core of the network can be located anywhere. In turn, the “ecosystem” actually becomes more important than where the base stations are located.
Interconnection-oriented data centers, such as those operated by Equinix, host the richest ecosystems of network, content, and cloud customers. Therefore, the data center takes on a new importance for DISH. This is because ecosystems are the most important location for DISH and these ecosystems are hosted within data centers.
Network Architecture – Changes the Towers Need
Providing a converged solution, means being able to offer multiple types of digital infrastructure to customers. Therefore, it is much more difficult for the traditional tower company to only offer vertical space on its towers. This circumstance is particularly evident with tower companies that are attempting to lease DISH space on their towers.
Given that DISH is building a new 5G network and needs to eventually lease 50k tower sites, it presents a major customer opportunity for tower companies. However, not all tower providers are relevant to DISH because of the way that DISH is building the core of their network. Specifically, DISH’s network uses a decentralized RAN architecture. Therefore, digital infrastructure providers have to be able to deliver edge workloads and fronthaul fiber to a tower site or small cell pole for DISH.
Crown Castle Signs 20k Tower Agreement with DISH Network
DISH’s network needs exemplify why Crown Castle was able to win a 15-year Master Lease Agreement on 20k of its tower sites from DISH. Crown Castle will not only provide the towers, but they will deliver a key part of the network. Specifically, Crown Castle is able to offer fronthaul fiber that goes back to DISH’s O-RAN / decentralized RAN architecture.
Crown Castle has the ability to deliver the fiber, connectivity and, ultimately, the edge hubs to build-out the decentralized RAN because they have a converged digital infrastructure solution. In turn, this converged solution expands the conversation between providers like Crown Castle and customers like DISH. Moreover, without these customer conversations, tower leases would not get signed.
Because of the need to provide a converged digital infrastructure solution, singularly-focused tower companies will not be able to win these large, attractive contracts. Instead, traditional tower companies will secure their fair share of tower amendments and in-fill colocation. However, they become less relevant in the future of this 5G network architecture.
Colony Capital’s Digital Infrastructure Provides a Solution
Colony Capital has already made progress in this Open-RAN architecture and understands the customer need. For example, Colony portfolio company, ExteNet has been a part of edge computing for three years. Specifically, ExteNet has built ~600 C-RAN hubs for different carriers. Moreover, Colony has taken all of this knowledge from building C-RAN hubs, and applied it to its other portfolio companies, DataBank and EdgePresence.
Through DataBank and EdgePresence, Colony is having significantly greater customer dialogue and customer wins by applying this knowledge of network architecture. Customers need data center providers to go beyond space, power, and cooling and focus on the “ecosystem”. Customers are choosing Colony because it has a suite of products and the digital infrastructure that aligns with customer desires. Indeed, Colony owns almost every piece of the digital infrastructure ecosystem, so no customer is left behind.
Convergence of Digital Infrastructure – Benefits to Colony Capital
Colony Capital has built a comprehensive digital infrastructure portfolio. Overall, it comprises ~29k towers, 95+ data centers, >140k fiber route miles and >40k small cell & distributed antenna system nodes.
Colony Capital believes offering a converged solution of towers, data centers (including edge and interconnection), fiber, small cells, and distributed antenna systems has synergistic benefits. Specifically, Colony has the ability to cross-sell space, power, and connectivity to customers across its multiple portfolio companies.
Colony Capital is unique as it offers a product suite, which no other digital infrastructure REIT can replicate. Indeed, Crown Castle which operates 40.1k towers, 80k route miles of fiber supporting more than 70k small cell networks is the closest provider to Colony’s offering. However, Crown Castle cannot offer a comparable solution to Colony’s more than 95 data centers.
Colony Capital is Building More, Buying Less Digital Infrastructure
Colony Capital is continuing to grow its digital infrastructure portfolio in order to better provide its customers a converged solution. Specifically, Colony is currently spending more than 50% of its time on greenfield opportunities, as opposed to acquiring existing companies.
Vertical Bridge – M&A Leads to Greenfield
In late November 2020, Colony Capital portfolio company Vertical Bridge acquired Eco-Site, the ninth largest tower company in the U.S. However, the rationale for the acquisition of Eco-Site was because the company is a developer of towers. Moreover, Colony has a strong conviction to build towers in the United States and wants to scale Vertical Bridge’s expertise in build-to-suit (BTS) towers with Eco-Site. Collectively, the two tower companies have constructed over 1.6k new towers in the last five years.
Andean Tower Partners and Highline do Brasil – Greenfield Builds
Additionally, Colony Capital through its portfolio companies Andean Tower Partners and Highline do Brasil is also building a significant number of towers in Latin America. Specifically, these companies are building towers in Brazil, Chile, Colombia, and Peru. Notably, the currency has been recently devalued in these countries. Therefore there exists a massive opportunity to build towers at historically low U.S. dollar-denominated prices.
Andean Tower Partners and Highline do Brasil are able to build towers for between $50k to $85k U.S. dollars. Indeed, this is an attractive basis versus historical comparisons. As a reference point, American Tower quotes typical tower construction costs of between $85k to $170k U.S. dollars for towers in Latin America. Given that Colony Capital is building towers at below these figures, it reinforces the strategy. Additionally, building towers in these markets helps to counterbalance some of the foreign exchange risk of operating in these countries.
Cellnex Acquisition of 24.6k Towers from CK Hutchison
Colony Capital also highlighted some of the rationale for its aversion to M&A currently. Specifically, Cellnex (a competitor) made a recent acquisition of 24.6k towers from CK Hutchison for €10bn. Colony notes that Cellnex is paying 4x to 5x replacement cost, on a per tower basis, which it deems expensive.
Key “per tower” valuation metrics for the Cellnex transaction were:
- Enterprise Value per tower (excluding the Build-to-Suit program) equates to €407k per tower, on the total 24.6k tower sites
- Enterprise Value per tower (including the Build-to-Suit program) equates to €382k per tower, on the total 29.9k tower sites
As a reference point, tower build costs in Europe typically range between €100k to €250k. Therefore, Cellnex does appear to be paying above replacement cost for the CK Hutchison towers. However, the multiple of replacement cost will vary by each of the six countries (Italy, the UK, Ireland, Sweden, Austria, and Denmark) that are part of the CK Hutchison portfolio.
