Fiber-Optic Cable Companies Draw Investors -- WSJ
May 06 2020 - 2:02AM
Dow Jones News
By Konrad Putzier
This article is being republished as part of our daily
reproduction of WSJ.com articles that also appeared in the U.S.
print edition of The Wall Street Journal (May 6, 2020).
Business closures and stay-at-home orders have hit the
real-estate sector hard. But an obscure corner of the industry is
benefiting from people staying at home.
Fiber-optic cables are drawing a growing interest from
investors. These cables, which transmit data through light and are
a crucial component of high-speed internet, aren't technically real
estate. But they are often owned by property investment firms and
leased out to users under long-term deals, much like office or
retail space.
The Internal Revenue Service treats income from leasing out
cables as property income, which has allowed publicly traded
real-estate investments trusts to build up sizeable portfolios.
Now, as the coronavirus pandemic causes more people to work
remotely and cloud-based applications such as Zoom Video
Communications Inc. become a crucial part of the economy, demand
for fiber-optic cables is increasing.
"These are literally the railroads of the future," said Marc
Ganzi, chief executive officer-elect of investment firm Colony
Capital Inc.
While the stocks of most real-estate investment trusts are down
this year amid concern over plummeting rental income, share prices
of companies that invest exclusively in digital-economy-related
real estate have rallied.
Shares of Crown Castle International Corp., a Houston-based
owner of cell towers and fiber-optic cables, are up 11% this year,
while the Vanguard Real Estate ETF is down 21%, according to
FactSet.
Crown Castle has invested $14 billion in fiber over the past
five years and plans to invest around $2 billion annually in the
coming years, said CEO Jay Brown. The company is betting that the
rollout of faster 5G internet across the U.S. creates the need for
more fiber and small cell towers, particularly in large, densely
populated cities.
Crown Castle and fiber-cable company Zayo Group Holdings Inc.,
which was recently acquired by a Colony affiliate and EQT, are
among the biggest owners of fiber. Tech giants such as Google
parent Alphabet Inc. have also invested in the sector.
In March, Digital Colony and EQT took Zayo private in a $14.3
billion deal -- one of the largest leveraged buyouts since the
financial crisis. More than a quarter of Digital Colony's $4.1
billion fund is invested in fiber, Mr. Ganzi said, and the company
plans to invest more than $1 billion in fiber over the coming
year.
In 2017, Deloitte estimated that the U.S. would need to invest
$130 billion to $150 billion in fiber over five to seven years to
roll out 5G across the country effectively. Now an increase in
remote work is giving fiber owners another boost.
"Working from home has really shifted how the internet is
working," said David Guarino, an analyst at Green Street Advisors.
Within large offices, data is often sent around through internal
networks. When people work remotely and do much of their work over
cloud-based applications, they send more data through fiber cables
owned by investment firms, Mr. Guarino said.
Much of the increase in remote work is likely temporary, but
more companies say they want employees to spend more time working
from home or from smaller satellite offices even after the pandemic
is over.
And while government orders halted construction of office or
apartment buildings in some cities, Mr. Brown said Crown Castle was
deemed an essential business and could continue laying cables
throughout the pandemic.
Some traditional real-estate investors began shifting to a
digital strategy well before the pandemic. Colony Capital said last
year it planned to sell most of its traditional property holdings,
including hotels and warehouses, and invest more in data centers,
fiber and cell towers through its platform Digital Colony
Management.
Tesh Durvasula, interim CEO of data center owner CyrusOne Inc.,
said the sector has benefited from investors fleeing industries
such as oil extraction, hospitality and airlines, which were hit
particularly hard by the pandemic.
"All of that capital had to relocate out of that," he said, "and
it's relocated into digital infrastructure."
Write to Konrad Putzier at konrad.putzier@wsj.com
(END) Dow Jones Newswires
May 06, 2020 02:47 ET (06:47 GMT)
Copyright (c) 2020 Dow Jones & Company, Inc.
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