Why DigitalBridge sees 'tremendous' opportunity in lease aggregation

As mobile network and datacentre operators grapple with capital needs, lease aggregation business models are becoming a growing opportunity for investors.

In 2021, DigitalBridge [NYSE: DBRG] acquired Landmark Dividend (Landmark), which it describes as one of the largest digital infrastructure ground lease owners in the country. In December, DigitalBridge announced that Abu Dhabi Investment Authority (ADIA) had agreed to acquire a 40% stake in company.

In the next couple of years Landmark plans to invest “hundreds of millions of dollars” to double its net operating income (NOI) which currently sits at “just shy of” US$200m, Steven Sonnenstein, senior managing director at DigitalBridge and chairman at Landmark, told TMT Finance.

The company — which currently owns between 3000 and 4000 assets across the digital infrastructure, outdoor advertising, and renewable power industries — plans to deploy the majority of its investment in the telecoms and datacentre space, he said.

The business plan is to acquire assets, such as ground leases, rooftop and datacentre easements, from real estate owners and operators. “The total addressable market of opportunities for Landmark is massive. Landmark is solely US-focused, for now, but there's a tremendous amount of opportunity that they can prosecute” Sonnenstein said.

One factor driving opportunity is the well-documented need for capital to fund datacentre development, Sonnenstein explained. “A lot of operators historically like to own their passive infrastructure, but ultimately from a capital utilisation perspective it's not what is most efficient. With the amount of investment that is required in developing for AI, and datacentre development more broadly speaking, it may not make sense for datacentre operators to own this infrastructure.”

It is a similar story in the mobile telecom vertical where mobile network operators (MNOs) that still own their towers could look to monetise these assets to fund growth, he added. “MNOs have in front of them billions and billions of dollars of investment, whether it's for spectrum or building out their networks, etc. The consumer at the end of the day doesn’t care who owns the land or the tower that their cellular service provider provides its service on, they just want the best service.”

An example of an operator looking to shed assets is AT&T [NYSE: T] which TMT Finance exclusively reported in November was reviewing options for a portfolio of rooftop assets.

Separately, TMT Finance has noted some wireless infrastructure companies also considering sales of ground lease assets. Among them was telecom infrastructure giant Crown Castle [NYSE: CCI], which TMT Finance exclusively reported in October was working with Bank of America to consider options for ground lease assets.

While Crown Castle’s ground lease review is understood to have been paused following the launch of a review of its fibre assets in response to a proxy campaign by activist shareholder Elliott Management at the end of 2023, sources have since told TMT Finance that other wireless infrastructure companies have considered similar ground lease reviews.

Across the pond, Cellnex [BME: CLNX] has mandated Goldman Sachs to consider options for its European ground lease portfolio, as per a TMT Finance exclusive from February.

Though, Sonnenstein does not expect this to become a sweeping trend. “Tower companies are generally very worried about a sort of predatory behaviour from a landowner. They are concerned that once you acquire the land, you will increase the rents and then, suddenly, their operating costs go through the roof. Landmark works in partnership with MNOs and does not engage in these practices. At the end of the day, it really comes down to a question of what’s the most efficient use of capital.”

He also noted that valuations for portfolios sold by tower companies, tend to be higher and less attractive to Landmark.

A mismatch in valuation expectations is ultimately the biggest challenge for businesses like Landmark, Sonnenstein went on to explain. “With interest rates at 5% your financing costs have gone up significantly, which in theory should impact valuations. We still are seeing pockets of value but there have been some transactions over the last couple of years where I’ve seen lower quality tower lease portfolios go for high-20s multiples, which I would consider aggressive.”

Sonnenstein is confident about Landmark’s growth prospects. “It comes down to the ability to execute on the opportunities in front of us,” he said. He points to Landmark’s team and “great leadership”, which includes a c-suite that have all been with the company for over a decade and through multiple ownerships, as being critical to achieving this.

With continued investment in this space, lease aggregators are likely to become an increasing part of the digital infrastructure ecosystem in the US and beyond.

Last year, EQT and Public Sector Pension Investment Board (PSP) completed the US$3bn acquisition of Radius Global Infrastructure. Radius, as of September 30, 2023, had interests in the revenue streams of 10,000 assets across around 7,600 different communications sites across the US and 20 other countries generating around US$192m in revenues.

In January this year, DigitalBridge-owned investment manager InfraBridge announced that Swiss Life Asset Managers had agreed to acquire a co-controlling equity stake in Telecom Infrastructure Partners (TIP), a London-headquartered lease aggregator of telecom sites in Europe and Latin America. The new investment will “accelerate TIP’s platform expansion”, a press release said.