You have been at the forefront of investing in the Digital Economy since 1994. Tell us how you started investing in data centers, cell towers, small cell and fiber companies.
After graduating from The Wharton School of the University of Pennsylvania, I worked for a real estate company. At the time, I was turning around distressed real estate but somehow some antenna leases ended up on my desk. At the same time, my mentor introduced me to two gentlemen, Alex Gellman and Jeff Ginsberg, who were in the cellular telephone business. Alex and Jeff had all this knowledge about cell phones which, by the way, were as big as a briefcase—almost like a huge brick—back then, and I knew real estate. The rest, as they say, is history. I’ve been working with Alex and Jeff in one way or another, ever since.
Collectively, in 1995, we formed Apex Site Management—a company that helped property owners to lease, manage and install wireless antennas and infrastructure on their rooftops. As a part of its business model, we branched out of rooftops, and forayed into tower space leasing, along with managing towers and rooftops. It culminated when we merged with SpectraSite and took the business public. SpectraSite was the fifth publicly-traded tower company during the 90s.
After a year’s tenure of running M&A, I decided to explore other avenues and I wound up at Deutsche Bank’s DB Capital Partners investing in infrastructure. I worked on various projects including a wireless company in Argentina, a tower company in Mexico, buying trucking licenses in Brazil, and leasing out server space to Brazilian companies. Five deals, several relationships and two years later, I left Deutsche Bank to start my second company, Global Tower Partners. The investment thesis was to take advantage of the dislocation between the relative share prices, owned towers and wireless companies vis-à-vis the intrinsic value of the towers.
Can you tell me a bit more about how you identified where the intersection of real estate and telecom was back then?
The two watershed moments for the tower industry were: one, creating securitization, and two, creating a restructure. It has allowed massive investment into the sector. At GTP, we raised $200 million and we started buying towers out of busted balance sheets. Alex Gellman, who was the firm’s president and COO, and I were able to leverage our combined skill set and really analyze towers as both real estate and telecom. When we did that, we realized that intrinsically good assets – towers – were embedded in those balance sheets at extremely good prices.
Back then, GTP was more real estate than it was telecom, much like data centers. When Blackstone recapitalized our business in 2005, we converted to a REIT. And that’s how the first tower REIT of its kind was born. We had to take all of the characteristics of a tower and show its similarities to real estate in order to convince the IRS that the towers were REIT-eligible assets. When we did that, we were able to get the Private Letter Ruling (PLR) from the IRS. It was an important catalyst for the entire industry.
The same year, we also did our first securitization and convinced real estate and bond investors that towers were an esoteric asset class they could put commercial mortgage-backed securities on. Shortly thereafter, Digital Realty became a REIT, paving the road for the likes of DuPont Fabros Technology, Equinix, CoreSite and QTS. Our nuanced pivot into real estate was important for digital infrastructure. It began attracting not just real estate capital, but also infrastructure capital.
The stalwarts in the sector, be it Providence, Berkshire, ABRY, GI Partners or Blackstone, had continuously made money in digital real estate assets. As more capital came into the sector, more private companies were incepted. As it got more competitive, prices soared but returns got compressed. The logical progression of real estate and infrastructure capital into the sector created even more liquidity. Add to this, more competitors like Brookfield, Macquarie, KKR, Stone Peak Infrastructure Partners, among others entering the ring. These companies are now very relevant in terms of owning data centers, towers, fiber and small cells. I’d make the fundamental argument that those investors actually dominate the landscape today, with regards to where assets are trading and what cap rates are being applied.