Colony Capital is led by Marc Ganzi who became the company’s new Chief Executive Officer in July 2020. Marc Ganzi is one of the most prolific investors in digital infrastructure, a guru of the wireless industry. However, given Colony has a lack of history and brand awareness in the digital infrastructure sector, the name is currently less mentioned amongst investors focused on the space. This is particularly evident when Colony Capital is compared to companies like American Tower, Crown Castle, Equinix, and Digital Realty. However, in 2020 Colony Capital is starting to become thought of as a true digital infrastructure stock. Institutional investors are increasingly including Colony Capital, led by Marc Ganzi in their digital infrastructure portfolio.

Marc Ganzi has positioned Colony Capital to focus on the four key sectors of digital infrastructure. These include towers, data centers, fiber and small cells & distributed antenna systems. Colony is particularly poised to capitalize on secular themes such as the digital infrastructure behind 5G technology. As Marc Ganzi famously said: “the dinner bill for 5G is coming… and it’s expensive”.

Colony Capital’s Investments by Capital Source

The convergence of towers, data centers, fiber, small cells, and distributed antenna systems is becoming increasingly evident. Further to this point, Colony Capital, under the leadership of Marc Ganzi, is truly embracing this convergence strategy. Overall, Colony Capital has $21.6bn of digital infrastructure assets under management (AuM) as of June 30, 2020. This represents 47% of the company’s total assets under management of $45.7bn, with the rest being invested in legacy real estate assets.

Colony Capital - Assets Under Management - Total
Colony Capital’s Total Assets Under Management as of Q2 2020.

These digital infrastructure investments have been made with third-party capital, as $21.6bn represents the value of the digital infrastructure investments that Colony Capital manages on behalf of its clients. Colony’s clients are Limited Partners (LPs), which made commitments to Colony’s fund, named Digital Colony Partners Fund I. These LPs include institutions such as the Teacher Retirement System of Texas, which made a $200m commitment and Oregon State Treasury which made a $150m commitment. Colony earns a management fee on these investments made with third-party capital (further details below).

Additionally, $540m worth of investments have been made using Colony Capital’s balance sheet as of June 30, 2020. Balance sheet investments include DataBank and Vantage Data Centers (North America). Therefore, these investments have been made with primary capital (i.e., Colony’s own cash). Instead of management fees, balance sheet investments contribute a portion of their earnings to Colony Capital’s earnings. The earnings stream is based on the percentage share which Colony owns, in the respective companies.

Third-Party Capital Investments by Colony Capital

Colony Capital - Assets Under Management - Digital
Colony Capital’s Digital Infrastructure Assets Under Management as of Q2 2020.

Breaking down Colony Capital’s $21.0bn (excluding balance sheet investments) of digital infrastructure assets under management further:

  • Digital Colony Partners I: $5.6bn worth of investments, including Zayo and Scala Data Centers. These investments were made through Digital Colony Partners Fund I, the company’s $4.1bn digital infrastructure private equity fund
  • Separately Capitalized Portfolio Companies: $9.6bn worth of investments, comprising six different companies, including Vertical Bridge and ExteNet Systems. These have been made through Digital Bridge and are therefore, separately capitalized companies. Digital Bridge is the company which Marc Ganzi ran before Colony Capital acquired it in 2019
  • Co-Investment (Sidecar) Capital: for large investments like Zayo and DataBank, Colony has syndicated a portion of the equity in these deals to co-investors. In aggregate, this syndicated equity amounts to $5.7bn

Distinctions between which pocket of capital that Colony Capital invests from determines the fee rates, which differ by capital source:

  • Digital Colony Partners I: charges a 1.2% management fee per annum
  • Separately Capitalized Portfolio Companies (Digital Bridge portfolio): charges a 0.8% management fee per annum
  • Co-Investment (Sidecar) Capital: charges a 0.5% management fee per annum

Colony Capital Portfolio Companies

Overall, Marc Ganzi has built Colony Capital to have a portfolio which comprises 9.6k towers, 95+ data centers, >135k fiber route miles and >35k small cell & distributed antenna system nodes. Below, are the companies within Towers, Data Centers, Fiber and Small Cells & DAS that comprise Colony Capital’s investment portfolio:

Towers – Investments by Colony Capital

Vertical Bridge

Vertical Bridge is the largest private owner of towers in the United States; meaning that it is the largest Tower Company after the publicly-traded Tower Companies: American Tower, Crown Castle, and SBA Communications. Therefore, Vertical Bridge, is the #4 tower player in the United States with more than 4k towers. The company’s market share equates to ~2.6% of the total of 154k towers operating in the United States. Additionally, Vertical Bridge has a portfolio weighted-average age of towers of ~6.8 years and weighted-average contract duration is >9 years.

Digita Oy

Digita operates ~580 towers, all of which are located in Finland. The company also owns more than 600 miles (1,000 kilometers) of fiber and four data centers in Finland. Digita is the leading digital terrestrial television (DTT) and radio broadcasting tower company in Finland. This means that the tower’s customers skew more towards television and radio broadcasters, as opposed to wireless carriers. Colony committed ~$300m to the acquisition and future growth of Digita Oy.

Highline do Brasil

Highline do Brasil has more than 300 towers built, which are located in Brazil. Additionally the company has a significant Build-to-Suit (BTS) order backlog, making Highline more of greenfield business plan. Highline also has a focus on partnerships with shopping malls, real estate owners and hospitals to provide indoor connectivity. As a reference point, Highline’s peers, American Tower and SBA Communications have 19k and 10k towers in Brazil, respectively.

Andean Tower Partners

Andean Tower Partners is the largest private tower operator in Peru, Chile, and Colombia. The company operates 2.9k towers in total, with 1.0k towers in Colombia, 875 towers in Peru, and 1.0k towers in Chile. Andean Tower Partners also provides digital infrastructure services including small cells, fiber, and distributed antenna systems. As a reference point, Andean Tower Partners’ peer, American Tower has 5k towers in Colombia, 2.9k towers in Chile and 2.3k towers in Peru.

Mexico Tower Partners

Mexico Tower Partners is the largest private Tower Company in Mexico. The company operates 1.8k towers and 2.5k sites, after being created from the merger of several infrastructure companies. Overall, Mexico Tower Partners focuses on providing solutions to the major wireless carriers in Mexico. As a reference point, Mexico Tower Partners’ peer, American Tower has 9.6k towers in Mexico.

Data Centers – Investments by Colony Capital

Vantage Data Centers

In July 2020, Colony invested $185m as part of a $1.2bn Colony-led investment for an 80% equity stake in Vantage Data Centers’ portfolio of 12 North American stabilized hyperscale data centers. Colony owns 12.3% of the stabilized portfolio, implying a valuation for 100% of Vantage Data Centers of $1.5bn. Vantage Data Centers currently operates 13 data centers, representing ~1,120 megawatts of power capacity. These data centers are located in both the United States and Europe, including:

  • 154 MW in Santa Clara, California (through two data centers)
  • 146 MW in Ashburn, Virginia
  • 160 MW in Phoenix, Arizona
  • 70 MW in Quincy, Washington
  • 11 MW in Montreal, Canada
  • 21 MW in Quebec City, Canada
  • 270 MW in Cardiff, United Kingdom
  • 55 MW in Frankfurt, Germany
  • 64 MW in Berlin, Germany
  • 40 MW in Zurich, Switzerland
  • 64 MW in Milan, Italy
  • 64 MW in Warsaw, Poland
Aptum Technologies

Formerly known as Cogeco Peer 1 and re-branded as Aptum, post-acquisition, the company was carved-out of Cogeco (TSE: CGO). Aptum is a provider of colocation, network connectivity and managed services in Canada and the United Kingdom. In 2019, Colony acquired Aptum for $720m Canadian dollars, equivalent to $547m U.S. dollars, equating to an EBITDA multiple of 9.0x.

Aptum is one of Canada’s largest managed IT platforms and provides hybrid cloud services to enterprise customers. The company had over 2.0k miles of dense metro fiber across Toronto and Montreal and 16 data centers in North America and Europe. However, Aptum separated its fiber assets from the company post-acquisition, which we will discuss below.

DataBank

DataBank currently operates 20 data centers, representing 54 megawatts of power capacity and 457k sqft, in the United States. In late September, DataBank announced the $1.4bn acquisition of 44 Data Centers from zColo, which is a division of Zayo. Once closed, DataBank will operate 64 data centers, representing 138 megawatts of power capacity and 1.2m sqft of data center space.

Colony Capital originally invested in DataBank in January 2020, purchasing 20% stake in the company. At the time, DataBank was valued at $185m, which equates to 17.6x EBITDA. As part of the zColo transaction, Colony Capital is investing an additional $145m from its balance sheet to maintain its 20% ownership stake in DataBank. This brings Colony Capital’s total investment in DataBank to $330m.

Scala Data Centers

In April 2020, Colony launched Scala, a Latin American hyperscale data center platform. Scala’s data center assets were acquired from UOL Diveo, an IT outsourcing company. Overall, Colony committed $410m to the acquisition and future growth of Scala Data Centers.

Scala is currelty the second-largest hyperscale data center provider in Brazil. In Brazil, the company ranks behind Ascenty which is owned by Digital Realty and Brookfield Infrastructure.

Latin America is in the formative stages of cloud computing. Historically, a lot of the cloud computing workloads resided in the United States. However, cloud workloads are beginning to shift into the Latin America region, with São Paulo, Brazil being the key market. Additionally, Rio de Janeiro, Brazil; Bogotá, Colombia; Santiago, Chile; and Mexico City, Mexico are experiencing increased workload activities too.

Colony expects Latin American leasing activity to be more pronounced in 2021 and 2022. As cloud providers continue shifting some of their workloads down into the Latin America region, Highline will grow.

Fiber – Investments by Colony Capital

Zayo

Zayo owns 133k fiber route miles and 13 million fiber strand miles, representing an average of 98 fibers per route, meaning it is dense fiber in terms of strand count. Zayo’s fiber also connects to 35.0k buildings, in the United States and Europe.

Colony Capital (through Digital Colony Partners I) owns a material interest in Zayo, which was taken private in March 2020, alongside EQT Partners, in a $14.3bn transaction ($6.3bn of sponsor equity and $8.0bn of debt). Moreover, Colony Capital has additional influence over Zayo through its $2.2bn of equity co-investment committed for Zayo.

Beanfield Metroconnect

Beanfield is a bandwidth infrastructure provider, serving carriers, enterprises, and multi-dwelling units throughout Canada. Notably, the company owns and operates 220 route miles of dense metro fiber in Toronto and Montreal. Overall, Beanfield has 47.2k fiber strand miles and 541 on-net locations. These on-net locations include 367 commercial, 161 multi-dwelling units, and 13 data centers. Colony committed equity of $100m to the acquisition and future growth of Beanfield.

Subsequently, Colony carved-out the fiber assets from another of its portfolio companies, Aptum (discussed above), and moved them into Beanfield. This shift allowed Beanfield to increase its planned build-out to be 4.6k miles of fiber in Toronto and Montreal.

Beanfield focuses on Northeastern Canada and the digital infrastructure vertical of fiber. Specifically, the company products center on dark fiber, lit services (enterprise fiber), and providing fiber-to-the-home passings. Additionally, the company is beginning fiber-to-the-tower and small cells initiatives.

Small Cells & DAS – Investments by Colony Capital

ExteNet Systems

ExteNet operates 31.0k small cell nodes, 600 C-RAN hubs, 4.0k owned fiber route miles and 16.0k leased fiber route miles across the United States. In November 2015, Digital Bridge (now part of Colony Capital), Stonepeak Infrastructure Partners, Goldman Sachs and Delta-V Capital acquired ExteNet for $1.4bn from a consortium of Palomar Ventures, Quantum Strategic Partners, SBA Communications (NASDAQ: SBAC), Columbia Capital, amongst others.

Additionally, in mid-October 2020, long-term institutional investor John Hancock Life Insurance Company led a consortium that acquired a 30% minority stake in ExteNet.

Regarding operations, monthly leases for ExteNet range from $700 to $800 per tenant. Also, lease terms are strong, ranging from 10 to 15-years, which is a long duration lease. Finally, carriers pay for 25% to 40% of ExteNet’s network construction costs.

Freshwave Group

Freshwave operates 4.0k small cell nodes and is the only independent provider of small cell infrastructure in the United Kingdom. The company was built through a series of relatively small acquisitions by Colony of different small cell and distributed antenna systems providers in the United Kingdom.

Colony acquired Stratto, a provider of distributed antenna systems and small cell networks. Stratto was focused on providing an Infrastructure-as-a-Service model to all carriers across the United Kingdom. Subsequently, Colony acquired Opencell, which had over 2.0k live cells across 100 networks and worked with all four major carriers in the United Kingdom. Colony further enhanced its United Kingdom presence with the acquisition of iWireless Solutions. iWireless was a leading small cell service provider with outdoor products and expertise, including outdoor connectivity solutions for the London Olympic Stadium and Twickenham Stadium.

Stratto, Opencell, and iWireless were collectively re-branded as Freshwave Group by Colony. Overall, Colony has committed more than $70m of equity in aggregate to Freshwave.

Colony Capital’s Digital Transformation

In Q2 2020, Colony Capital, under Marc Ganzi’s leadership, took $2.1bn in impairments to bring the value of its assets, mainly real estate, in-line with fair value. The rationale being that Colony desired accelerated disposition of its legacy real estate assets and to shift its focus to its digital infrastructure transformation.

Colony Capital - Summary Pro Forma Book Value
Colony Capital’s Summary Pro Forma Book Value as of Q2 2020.

Healthcare Real Estate

The Healthcare segment consists of 357 properties including Senior Housing facilities, Medical Office Buildings, Skilled Nursing Facilities and Hospitals. Healthcare, has been an outperformer with collections remaining high, even though the sector has been under a lot of operational pressure. Colony believes that these assets will perform now and through the end of 2020, including through the COVID-19 period. Colony Capital and Marc Ganzi have stated they are not seeking near-term asset sales in the healthcare segment. However, the company could opportunistically sell the business if it received an appropriate offer.

Industrial Real Estate

Colony sold the Industrial Real Estate business in December 2019 for $5.7bn to Blackstone. Therefore, this segment is no longer included in the book value of the company as of Q2 2020 (seen above).

Hospitality Real Estate

On September 24th, Colony sold hospitality portfolios, consisting of 22,676 rooms across 197 hotel properties in the United States to Highgate. Highgate is a hotel-focused real estate private equity firm. The transaction value is ~$2.8bn, including the purchase price of $67.5m for all of the Hospitality Interests. Additionally, Highgate is assuming ~$2.7bn in consolidated investment-level debt associated with the Hospitality Interests.

Colony Capital expects to close the sale of the Hospitality Interests in the first quarter of 2021. Therefore, this segment will remain on Colony’s balance sheet for the next couple of quarters prior to closing.

Colony Credit Real Estate (NYSE: CLNC)

Colony Credit Real Estate trades on the New York Stock Exchange, under the ticker CLNC. The company is a credit real estate investment trust (REIT) externally managed by Colony Capital with $4.7bn in assets and $1.7bn in book equity value, equivalent to $13.06 per share, as of June 30, 2020 – compared to its recent trading value of <$6 per share. Colony Capital owns 48 million shares in Colony Credit Real Estate, equivalent to 36% of Colony Credit Real Estate.

Further, Colony Credit Real Estate announced that a new Chief Executive Officer, Michael Mazzei, was installed in April 2020 to help stabilize the business. The company also plans to grow in the future with a new digital infrastructure debt-focused strategy. This strategy focuses on making loans to companies in the four digital infrastructure verticals. It is also worth noting that Marc Ganzi does not sit on the board of Colony Credit Real Estate.

Other Equity and Debt

In Other Equity and Debt, Colony has harvested $340m in year-to-date proceeds. Colony expects to continue to generate significant capital from this business in the second half of 2020, given that the segment represents a significant $2.4bn of assets. Specifically, Other Equity and Debt includes non-performing first mortgage loans, preferred equity, mezzanine loans and real estate equity investments across a number of different sectors including office, multifamily, hospitality, industrial and oil & gas.

Examples of Colony’s largest positions in the Other Equity and Debt portfolio include:

  • Non-Performing First Mortgage Loans on Office buildings in Ireland
  • Preferred Equity position in Multifamily properties across the Southeast United States
  • Real Estate Equity position in Industrial assets across the United States

Other Investment Management

This segment represents the value of fee streams from real estate-related management contracts. The management contracts include: i) legacy real estate management businesses, ii) the external management contract with Colony Credit Real Estate and iii) certain NorthStar Healthcare Income products.

Trust Preferred Securities (TruPS)

Trust Preferred Securities represent a $280m liability at a cost of 5.375% per annum. This liability represents junior subordinated debt from Colony’s legacy NorthStar Realty Finance acquisition. The Trust Preferred Securities are non-recourse to Colony Capital but an obligation of the NorthStar subsidiary. This particular NorthStar subsidiary owns Healthcare, Hospitality, and other non-core assets.

Digital Infrastructure Addressable Market

It is clear that Colony Capital and Marc Ganzi continue to work toward their pivot to digital infrastructure. Thus, it is important to frame out the total addressable market in which Colony Capital will be making investments in. This can be used as a benchmark against the amount of money Colony is targeting to spend in digital infrastructure, which ~$2.5bn per year.

In 2020, customers (e.g., carriers) will spend $378bn of capital expenditures across towers, data centers, fiber, and small cells.

Digital Infrastructure Addressable Market - Colony Capital

Fiber

Represents $200.5bn of capital expenditures, including deployment of 39 million new fiber route miles. New fiber route miles deployed is inclusive of metro route miles, subsea route miles and fiber-to-the-home passings. Key drivers of fiber investment include i) dark fiber, which is a significant part of edge compute, ii) long-haul routes, specifically for hyperscale customers, which are providing strong returns and iii) dark fiber connectivity to data centers, which revolves around hyperscale customers.

Fiber is the largest component of capital expenditures because it is the “connective tissue” that binds all of the digital infrastructure together. Fiber makes everything work including: data centers, towers, small cells and fiber-to-the-home. Everything revolves around these “railroads” of the future, which is fiber.

Towers

Represents $18.9bn of capital expenditures, including building 87k new towers.

Small Cells

Represents $3.2bn of capital expenditures, including building 133k new small cell nodes. Small Cells have a comparatively low investment going into them as a segment, compared to the other sectors of digital infrastructure. This signifies that the market is truly at the beginning of 5G roll-outs, given that small cells are a key requirement for 5G, particularly for high-band spectrum.

Data Centers

Represents $17.5bn of capital expenditures, needed for an expected 1,400 MW of new hyperscale & colocation absorption. Specifically, a significant portion of these capital expenditures are going towards funding Hyperscale facility builds.

Other Digital Assets

Represents $1.2bn of capital expenditures, which is a catch-all category.

Colony’s United States Ecosystem vs. Peer Group

Colony Capital - U.S. Ecosystem vs. Peer Group

Colony Capital and specifically Marc Ganzi, makes the point that the company is differentiated from other digital infrastructure companies. Whether those companies are private equity investors like Macquarie and Brookfield or publicly-traded digital infrastructure Real Estate Investment Trusts (REITs), like American Tower and Crown Castle in the towers sector, or Equinix and Digital Realty in the data center sector.

Differentiation of Colony Capital and Marc Ganzi

Marc Ganzi stipulates that the key differentiator between Colony Capital and its peers, is that Colony is the only provider that can deliver end-to-end digital infrastructure. Specifically, Colony Capital is investing in all four segments of digital infrastructure, in its core market of the United States.

In the United States, Colony’s portfolio consists of 4.6k towers, 30k small cells, 135k route miles of enterprise and dark fiber, 45 colocation data centers, 19 edge data centers and 9 hyperscale data centers. Therefore, Colony is the only Real Estate Investment Trust (REIT) that allows investors to gain exposure across the entire digital infrastructure ecosystem.

When compared to other private equity firms and other publicly-traded digital infrastructure Real Estate Investment Trusts (REITs), no other Real Estate Investment Trust (REIT) can deliver the promise of the entire digital infrastructure ecosystem.

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