Fiber-Optic Cable Companies Draw Investors -- WSJ

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. (CCI), 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 (CCI) 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 (CCI) 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 (CCI) 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. (CONE), 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


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