Colony Capital has built a digital infrastructure portfolio which comprises ~29k towers, 95+ data centers, >140k fiber route miles and >40k small cell & distributed antenna system nodes. A key focus for Colony Capital has been investing in the data center sector, in which it has purchased companies in four critical sub-sectors. Specifically, Colony has invested in the following data centers sub-sectors, through its various portfolio companies:
- Hyperscale: Vantage Data Centers (North America) and Vantage Europe
- Edge: DataBank
- Micro Edge: EdgePresence
- Managed IT Services: Aptum Technologies
Vantage Data Centers (North America) – Hyperscale Data Centers
Vantage Data Centers (North America) owns 13 operating hyperscale campuses and has 4 which are currently under development. The company’s data center portfolio has 94% occupancy, with a weighted average lease duration of over 11 years and 3% rental escalators. Furthermore, these long-term leases generate an income stream from counterparties that, in aggregate, are more than 90% investment grade.
In October 2020, Colony Capital alongside third-party capital, invested $1.36bn for a ~90% equity interest in Vantage Data Centers’ portfolio of 12 stabilized hyperscale data centers in North America. Thus, Vantage, overall, was valued at $1.5bn. Third-party capital was provided by CBRE Caledon and a series of pension funds. Further, Colony Capital’s balance sheet investment is ~$200m, representing a ~13% ownership interest.
United States – Greenfield Data Centers
Colony Capital has not found many attractive opportunities to acquire further hyperscale platforms in the United States, using Vantage Data Centers. Therefore, Colony has taken more of a greenfield approach across the United States, by building-out new data center capacity. Specifically, Colony Capital references the Northern Virginia, Silicon Valley, Pacific Northwest, and Phoenix data center markets as case studies for Vantage’s greenfield build-out.
Northern Virginia – Ashburn
At full build-out, Vantage will operate 5 data centers, representing 146 megawatts of power capacity and 1.0 million sqft at its Northern Virginia campus. Specifically, in Ashburn, Vantage owns a significant plot of land, with capacity to build slightly over 100 megawatts. Furthermore, Vantage has already turned on its first 25 megawatts of capacity and has leased ~13 megawatts of capacity. Colony also indicates that further leasing deals are in the pipeline for its Northern Virginia campus.
Overall, the Northern Virginia market is competitive and does not present an opportunity for Vantage to be significantly differentiated. Assessing Northern Virginia, Colony notes that Vantage is performing well in the market, but the market itself is disappointing, relative to expectations.
Silicon Valley – Santa Clara
At full build-out, Vantage will operate 9 data centers, representing 154 megawatts of power capacity and 876k sqft at its two Santa Clara campuses. Vantage recently turned on its eighth data center in the market, which represents over 64 megawatts of power capacity, which the company is rapidly leasing up. Furthermore, Vantage is the largest provider of hyperscale data center capacity in the San Francisco Bay Area.
Assessing Santa Clara, Colony notes that Vantage has had tremendous success in the market, and the market itself has exceeded Colony’s expectations.
Pacific Northwest – Quincy, Washington
At full build-out, Vantage will operate 3 data centers, representing 70 megawatts of power capacity and 512k sqft at its Quincy, Washington campus. Currently, Vantage has two significant data centers in the Quincy, Washington market, with the capacity to keep building.
Vantage is building in Quincy, Washington, which is located ~150 miles outside of Seattle. The market represents a low-cost location for data center capacity in the Pacific Northwest and alternative to the costlier markets of Seattle and Portland.
Phoenix – Goodyear, Arizona
At full build-out, Vantage will operate 3 data centers, representing 160 megawatts of power capacity and 600k sqft at its Phoenix campus. Currently, Vantage is developing the first single-story facility of the campus, which will provide 32 megawatts of power capacity.
Canada – Targeted Data Center M&A
Vantage has a dominant footprint and market position in the Canadian markets of Montreal and Québec City. The company has been very active in those markets through both greenfield and brownfield projects.
Specifically, in late November 2020, Vantage announced the acquisition of the hyperscale data center business from Hypertec in Montreal, Canada. Hypertec’s 49 MW campus includes 25 MW across two existing facilities and 24 MW of expansion capacity. Hypertec was a transaction where Colony was able to negotiate on a unilateral basis with the owner, where it had the funding, and acted quickly.
Additionally, in 2019, Vantage acquired 4Degrees Colocation from Videotron, a subsidiary of Quebecor Media, for $193m. At the time, 4Degrees Colocation had two data centers, with 16 MW of power capacity.
Vantage Europe – Hyperscale Data Centers
Vantage Europe owns 1 operating hyperscale campus and has 6 which are currently under development. The company was assembled through the purchase of Etix Everywhere in February 2020 and Next Generation Data in July 2020. Notably, the acquisitions, were driven by the desire to position Vantage Europe to build more data center capacity for its key hyperscale customer relationships.
Following the combination of Etix Everywhere and Next Generation Data, Vantage Europe will be able to offer a step-function increase in capacity. Once all of its markets are fully built-out, Vantage Europe will comprise:
- Cardiff, United Kingdom: 3 data centers, representing 270 megawatts of power capacity and 1.5 million sqft
- Frankfurt, Germany: 3 data centers, representing 55 megawatts of power capacity and 650k sqft
- Berlin, Germany: 2 data centers, representing 64 megawatts of power capacity and 550k sqft
- Zurich, Switzerland: 4 data centers, representing 40 megawatts of power capacity and 400k sqft
- Milan, Italy: 4 data centers, representing 64 megawatts of power capacity and 316k sqft
- Warsaw, Poland: 2 data centers, representing 64 megawatts of power capacity and 540k sqft
Overall, Vantage Europe is active in 8 markets across Europe, with a deep pipeline of more than 278 megawatts across the continent. Indeed, this European pipeline represents one of the largest pipelines amongst all hyperscale data center providers in Europe.
Strategy of Vantage Europe
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. Specifically, it is Colony’s view that the FLAP markets have, overall, been appropriately built-out already and they are difficult markets to break into. For example, London has land constraints related to property interest, Frankfurt has power supply constraints and Amsterdam has zoning constraints.
Support of Colony Capital in Data Centers
Vantage Europe exemplifies Colony Capital’s flexible mandate to pursue inorganic strategies by buying data centers such as Etix Everywhere and Next Generation Data. At the same time, Colony’s flexibility extends to allowing Vantage Europe to pursue significant greenfield development builds.
Hyperscale Data Center Market in Europe
The hyperscale data center market is particularly unique in Europe given the continent’s strict data sovereignty laws, which include the General Data Protection Regulation (GDPR). In turn, this means that the hyperscale customers need to have both high-power density applications and storage in each of the markets in which they operate. As a result, a stronger demand environment is created for data center capacity from companies such as Vantage Europe.
DataBank – Edge Data Centers
DataBank operates 20 data centers, representing 54 megawatts of power capacity and 457k sqft, in the United States. In September 2020, DataBank agreed to acquire zColo, from Zayo, for $1.4bn. The acquisition of zColo adds 44 data centers, 13 key interconnect locations, in 23 markets across the United States and Europe to DataBank’s data center assets.
Part of the rationale for the transaction was that the DataBank and zColo businesses did not compete. Each business had a presence mainly in markets where the other was not. Specifically, DataBank has only three overlapping markets with zColo (Atlanta, Dallas, and Minneapolis). Thus, zColo brings DataBank 20 new markets, creating significant new footprint for DataBank to cross-sell its customer base into.
Moreover, zColo has a number of different customers that DataBank does not have. This presents a significant opportunity for DataBank to scale its customer relationships.
Regarding personnel, integration of the DataBank and zColo engineering and sales teams is also additive. Specifically, zColo has engineering and sales teams in locations where DataBank does not, adding to the deal rationale.
Geographic Coverage and Scale
DataBank’s larger portfolio will serve the expansion of cloud and content workloads into primary and secondary edge markets. Specifically, edge workloads are shifting, and DataBank will be able to address customers that are putting on capacity in Tier-2 and Tier-3 markets. DataBank is positioned to enable hyperscale customers to deploy 0.25-megawatt to 1-megawatt workloads, at the edge of the network.
Edge Compute Market in the United States
Edge computing is a critical component of technologies like 5G. Moreover, edge computing is facilitating the convergence of compute, storage, and networking.
Ultimately, these trends will drive strong growth in edge server deployment. Over the next 8 years, edge servers will support 10% of cloud workloads globally, which is an increase from only 0.2% currently. Therefore, over 1.5 million servers will need to move into edge data centers around the world. Indeed, this represents a significant amount of workspace that needs to be fulfilled and real estate that needs to be leased.
In turn, the edge opportunity is a significant growth driver for DataBank, and the transformative acquisition it is making with zColo.
Interconnection / Cross-Connects
DataBank and zColo will together have a stronger ecosystem of cross-connects. Specifically, the combined company will have 30k network cross-connects, up from only 6.8k at DataBank currently. In turn, this makes the business one of the largest interconnection data center providers in the United States. As a reference point, some of the leaders in interconnection have the following number of cross-connects:
- Equinix: 160.5k cross-connects in its Americas division
- Digital Realty: 162k cross-connects globally
- CoreSite: 30k cross-connects in the United States
Interconnection is of growing importance for data center customers as data integration, and low latency capabilities become higher priorities.
Capital from Colony to Grow Data Centers
Once the DataBank and zColo transaction has closed, the company will have a capitalization of $2.9bn. Specifically, the business will have been funded with $1.7bn of equity and $1.2bn of debt. Furthermore, Colony Capital will be giving the legacy zColo business significantly more capital and attention to enable it to grow further.
Previously, zColo was stranded inside of Zayo, and it was not getting the management time and attention, as it will as an independent business unit. Instead, zColo was primarily used to help extend Zayo’s fiber network into a data center environment. DataBank is taking advantage of this opportunity at zColo to make the business better, run more efficiently and provide it with capital to grow.
Initial Churn Period
Initially, there will be a period of customer churn where DataBank will work through the old customer base of zColo and the products they were sold. Specifically, this customer churn relates to Zayo’s strategic decision to exit the managed cloud services segment, over 1.5 years ago. At the time, Zayo made the decision to focus on its infrastructure offerings. Thus, the customer base was already churning at zColo, which was evident in their financial results when Zayo was a public company.
Since Colony Capital took ownership of Zayo in March 2020, the company has continued to wind-down those hybrid cloud customers. Therefore, there is some nominal churn expected at the beginning from the legacy zColo business, which DataBank will deal with. However, as some of this zColo inventory opens up, as a result of churn, the inventory can then be sold to new edge customers, which is DataBank’s expertise.
EdgePresence – Micro Edge Data Centers
To further take advantage of the edge opportunity, Colony made an investment in the space through its portfolio company DataBank. Specifically, DataBank announced in mid-October that it made a $30m control investment in EdgePresence, an owner and operator of multi-tenant, modular data centers. EdgePresence provides space, power, bandwidth, and interconnection across key United States markets.
EdgePresence’s micro edge data centers are modular, purpose-built data centers, comprehensively and compactly designed. These facilities include critical power, monitoring, physical security, and cooling. Specifically, these data centers are often situated in targeted locations at the base of cellular towers.
By deploying micro edge data centers at the base of towers, EdgePresence brings compute and applications adjacent to mobile infrastructure. Specifically, compute and applications are brought close to the LTE radios and 5G radios that are deployed on Vertical Bridge’s ~20k cellular towers. Additionally, EdgePresence is partnering with American Tower and SBA Communications, where they share in the platform’s success.
Overall, EdgePresence’s goal is to create low-latency edge solutions on a micro basis for its customers.
Aptum Technologies – Managed IT Services
Aptum is one of Canada’s largest managed IT services platforms, with 14 data centers. The company provides hybrid cloud services to enterprise customers.
Formerly known as Cogeco Peer 1 and re-branded as Aptum, post-acquisition, the company was carved-out of Cogeco (TSE: CGO). In 2019, Colony acquired Aptum for $720m Canadian dollars, equivalent to $547m U.S. dollars, representing an EBITDA multiple of 9.0x.
The company had over 2.0k miles of dense metro fiber across Toronto and Montreal in North America. However, Aptum separated its fiber assets from the company post-acquisition, transferring them to another Colony Capital portfolio company, Beanfield Metroconnect.
Data Centers – Summary and Comparisons
Overall, Colony Capital has clearly invested in four critical data center sub-sectors. These include hyperscale through Vantage Data Centers (North America) and Vantage Europe, edge through DataBank, micro edge through EdgePresence and managed IT services through Aptum Technologies. Moreover, each of these data center sub-sectors have unique characteristics from one another.
In terms of deployment size, Vantage in the hyperscale sub-sector, caters to different types of workloads, as compared to DataBank, in the edge sub-sector. Specifically, every deployment at DataBank is currently for workloads of 1 megawatt or below. Whereas every deployment at Vantage is currently for workloads of 1 megawatt and above.
Bifurcation exists, from a workload perspective, in terms of what each customer is seeking. In turn, Colony Capital has been able to isolate its customer requirements. Specifically, Colony is creating the proper white space, through its portfolio companies, for both types of customers.
DataBank is very focused on the United States, whereas Vantage is a multi-national player. Specifically, Vantage operates in Europe, the United States and Canada. Whereas DataBank has a singular focus on edge computing in the United States.