Colony Capital today announced its Q1 2021 earnings and provided updates on its rotation to digital infrastructure assets under management (AUM), investment management business, balance sheet, and thematic topics within the sector.

Digital Infrastructure – Colony Capital’s AUM Rotation

Colony Capital’s digital infrastructure rotation is nearing completion with its digital assets under management (AUM) rising to $32bn, comprising 70% of total AUM as of May 2021. Of this digital AUM, the company’s Digital Investment Management (third-party capital) was $30.7bn. While Colony Capital’s Digital Balance Sheet investments, which are Vantage stabilized hyperscale data centers (Vantage SDC) and DataBank, made-up the remaining $1.3bn of AUM.

Notably, Colony Capital’s Digital Fee Earning Equity Under Management (FEEUM) is only $12.9bn (42% of total AUM). This is because certain pockets of capital, namely co-investments and portions of former Digital Bridge portfolio companies, do not generate management fees.

Digital Investment Management (Third-Party AUM)

Colony Capital notes that Digital Colony Partners I is now fully-deployed and the firm is focusing on investing funds from Digital Colony Partners II. To-date, Digital Colony Partners II has already made $3bn to $4bn of equity commitments to four investments. Specifically, these equity commitments are for Boingo Wireless, Vantage Towers (€500m), Edgepoint Infrastructure, and AgileDC.

Digital Infrastructure – Capital Sources

As of Q1 2021, third-party digital AUM was $30.7bn, comprised of the following five sources of capital:

  • Digital Colony Partners I: $5.9bn AUM, of which $3.2bn (54%) is FEEUM, generating management fees of 1.2% per year
  • Digital Colony Partners II: $4.8bn AUM, of which $4.0bn (83%) is FEEUM, generating management fees of 1.2% per year
  • Separately Capitalized Portfolio Companies (Digital Bridge): $9.6bn AUM, of which $2.5bn (26%) is FEEUM, generating management fees of 0.9% per year
  • Co-Investment (Sidecar) Capital: $9.9bn AUM, of which $2.8bn (28%) is FEEUM, generating management fees of 0.5% per year
  • Liquid Strategies: $0.5bn AUM, of which $0.4bn (83%) is FEEUM, generating management fees of 0.5% per year

Colony Capital Balance Sheet – Q1 2021

Colony Capital’s Digital Balance Sheet has $1.3bn of AUM comprised of minority interests in Vantage SDC (13%) and DataBank (20%). As of Q1 2021, Colony Capital, through Vantage SDC and DataBank owned 76 data centers, with 280+ megawatts of power capacity, which were 79% utilized. Overall, this portfolio produces $743m of annual revenue and secured $23m of annualized bookings for Q1 2021.

(1) DataBank

DataBank operates 64 data centers, representing 138 megawatts of power capacity. Additionally, these data centers comprise 1.2 million sqft, in the United States and Europe, supporting over 3.0k customers.

(2) Vantage SDC

Vantage SDC operates 12 data centers, representing 150 megawatts of power capacity. Additionally, these data centers comprise 1.4 million sqft, in the United States, supporting over 80 customers. As of Q1 2021, Vantage SDC’s portfolio utilization was 95%.

In 2021, Colony Capital intends to acquire one more data center for Vantage SDC in Santa Clara, California, through the forward contract it has in-place with Vantage Data Centers (North America). Despite similar names, Vantage Data Centers (North America) is a portfolio company from Digital Bridge, which has significant co-investor ownership. Specifically, Vantage SDC has an agreement with Vantage Data Centers (North America) to acquire hyperscale data centers at a set cap rate.

Digital Infrastructure – Q1 2021 Themes

Colony Capital shared its latest point-of-view on three themes that it is focusing on as a digital infrastructure investor.

(1) Greenfield and Brownfield Mix – Q1 2021 View

Given record brownfield (i.e., M&A) pricing seen in “overheated” auctions, Colony Capital is focusing on proprietary deal flow. Therefore, in 2021, Colony Capital is targeting a mix of 60% to 65% greenfield and 35% to 40% brownfield investments.

(2) Investing Internationally – Colony Capital

Colony Capital notes that it is selective about investing in international markets. For example, the firm favors investing in Brazil over countries like India and Argentina.

Brazil – Highline do Brasil

Colony Capital and its co-investor partners, such as AIMCo, see Brazil as an attractive digital infrastructure market, particularly for towers. Indeed, this notion has support from strong organic growth at Highline do Brasil, a portfolio company of Digital Colony Partners I.

Overall, Highline do Brasil organically grew its tower business by 22.7% in 2020. Specifically, contractual rental escalators through the company’s master lease agreements (MLAs) contributed 9.5% of growth. Additionally, lease-up by Highline do Brasil added a further 13%+ of growth.

India and Argentina – Not In-Focus

To-date, after reviewing a number of investment opportunities, Colony Capital has chosen not to make investments in India and Argentina.

For example, In India, Colony Capital passed on the opportunity to acquire Reliance Jio Infratel’s 130k towers in December 2019. Ultimately, this business was sold to Brookfield Infrastructure for $3.7bn, in exchange for a 30-year Master Services Agreement (MSA). Specifically, Marc Ganzi has noted previously that “tower operators have gotten hurt there pretty sizably” and that Colony Capital will “probably not look at towers in India for the moment”.

In Argentina, Colony Capital notes that the country’s historical currency devaluations are a particular risk to investing in the country.

(3) Minority Interest Sales – Colony Capital

Colony Capital highlighted similar minority interest sales it has completed to American Tower’s recent sale of 30% of its European business to CDPQ for €1.6bn. Firstly, in October 2020, ExteNet sold a 30% minority stake to John Hancock Life Insurance. Secondly, in April 2019, Vertical Bridge sold a 30% minority stake to CDPQ.

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