Brookfield Infrastructure Partners, Letter to the Unitholders, 1st
Quarter, 2019, Part Three
Update on Strategic
initiatives
Over the course of the last several weeks, we successfully
completed the previously mentioned acquisitions of an Indian natural gas
pipeline and a South American data center business. Execution of our 100-day
integration plans at both businesses are progressing well.
The acquisition of the federally regulated assets in our
Western Canadian Midstream business is expected to close in the third quarter
of 2019 upon completion of a regulatory process.
We invested approximately $200 million for our share of
Ascenty, our South American data center business. Funding also included capital
for 2019 growth capital expenditures. Since closing the transaction, the
business has expanded its data center business into Chile, leasing up to 6MW of
capacity over the next 10 years to an investment-grade customer. This anchor contract will facilitate the
construction of the facility, which is an accretive initiative that was not
contemplated in our original business plan. The business is performing
well, our partnership with Digital Realty Trust is generating the desired
synergistic benefits we expected, and we are identifying additional prospective
“tuck-in” opportunities that will grow Ascenty’s presence across South America.
Data Infrastructure
Initiatives
Over the past year we have highlighted the data
infrastructure segment as an area of growth for Brookfield Infrastructure. The
sector continues to offer interesting investment opportunities given the large
amounts of capital that need to be deployed in the space. Data has been one of the fastest growing commodities in the world.
We expect this rapid growth to persist for the foreseeable future, driven by several
factors including greater smartphone
penetration, increasing video consumption, the advent of 5G networks and new
and evolving uses, such as the internet of things, artificial intelligence and
other applications that depend on low latency. We have identified this
exponential growth in data usage worldwide as a significant opportunity,
particularly with the largescale infrastructure investments that will be
required to support data transportation and storage.
As we position our business to take advantage of this
secular trend, we have decided to focus on the following investment areas – wireless infrastructure (i.e. telecom
towers), fiber networks, data centers and integrated data operations. Our
belief is that as people, places and objects become increasingly more
interconnected, the importance and value of data infrastructure assets will
continue to rise. Given the ongoing
evolution and innovation taking place in the telecom sector, we are seeking to
detach these assets from their corporate owners and focus on contractual
arrangements that hold attractive infrastructure characteristics and bear
limited technology and obsolescence risks.
Over the last few years, we have made several investments to
grow and expand our data infrastructure business and today we are invested
across several of the segments.
• Wireless infrastructure –
In 2015, we acquired a leading independent broadcast and telecom tower operator
in France
with over 7,000 towers and active rooftop sites. Growth in this business is
driven by the requirement for mobile network operators to increase their site
coverage to meet spectrum license obligations and improve network capacity to
support higher data speeds and usage.
We believe investments in wireless infrastructure are
attractive as these are long-life assets, which benefit from natural barriers
to entry due to location scarcity and challenging permitting environments. In
addition, customers are willing to enter into long-term contracts (up to 20
years), with embedded indexation to secure capacity given how critical these
assets are to their wireless offering.
• Fiber networks – Our
investments in fiber networks to date have been through our existing portfolio
companies. Our U.K.
regulated distribution business is deploying fiber-to-the-home (FTTH) networks
to new housing developments as part of its multi-utility offering in response
to customer demand for faster and more reliable broadband solutions. Meanwhile,
our French telecommunications infrastructure business is rolling out four FTTH
networks to connect over 700,000 households in the next few years as part of
the French government’s national broadband plan. Residential fiber networks offer utility-like characteristics due to
the significant cost to build-out a dense network, which in-turn limits the
risk of replication. Furthermore, like traditional utilities, broadband is
becoming a basic household need, as societal demand for reliable connectivity
increases.
We are also reviewing opportunities to acquire fiber
networks specializing in enterprise services. We are looking for businesses
with dense fiber networks, which provide a combination of dark and lit fiber
offerings. The dark fiber offering
provides a solid base with strong downside protection, due to the longterm,
take-or-pay nature of the contracts, while lit fiber allows us to participate
in demand for more data at higher broadband speeds. We believe having
highly dense fiber networks provides us with substantial optionality as the
world becomes increasingly interconnected.
• Data centers – We have
been most active with data centers over the last year, having acquired
businesses on three continents. Our
focus is on the retail colocation and wholesale data center models, with
the key differentiator between the two being the amount of computing power
required by our customers.
In our U.S.
retail colocation business, we are improving the operations following the
carve-out from AT&T by (i) assembling an experienced management team and
dedicated sales function and (ii) repositioning the platform to become carrier
neutral. Furthermore, with our global footprint, we believe there will be
opportunities to enhance the portfolio by making tuck-in acquisitions to
strengthen our presence in existing markets or enter new regions. In retail colocation, customer contracts
are typically three to five years, with strong renewal rates, due to high
customer switching costs. Customer stickiness is further enhanced through a
platform effect as our customers are often in multiple sites or locations,
which increases the complexity of switching given their network architecture.
Meanwhile, our wholesale platforms in South
America and Asia Pacific are in regions where cloud computing is
at an earlier stage of adoption. This should allow us to deploy additional
capital on an accretive basis to build new data centers for large technology
companies expanding their presence in the regions. The build-out of new sites is supported by anchor tenants entering into
long-term, take-or-pay contracts (up to 10 years), which will allow us to
achieve attractive, risk-adjusted returns within the initial contract term and
significantly de-risk the investment.
• Integrated data/communications
operations – A potential area of opportunity for us is the
acquisition of “asset heavy” integrated telecom operators. As the name implies, these are businesses that provide utility-like
broadband and wireless services to customers through owner-operated tower and
fiber networks. As we review potential opportunities, we have defined a
list of key characteristics we are looking for:
− Leading fixed (and wireless) player with a presence in a single
market, region or country;
− Ownership of
high-quality data infrastructure assets with high replacement cost;
− Markets which have
demonstrated a stable operating and regulatory environment; and
− Favorable
competitive dynamics which facilitate underwriting of long-term market share
assumptions.
These businesses will have customer-facing activities
similar to our distribution companies. For
asset heavy operators, these activities represent a small fraction of the
margin generated in the overall business. For certain large-scale
businesses, an opportunity exists to consider separating underlying network
infrastructure from the service business. However, this would need to be
assessed in the context of the existing market structure. In general, we believe that managing and retaining the customer
relationship is important, as it provides increased flexibility to tailor
the network to meet customers’ requirements and increases customer stickiness by bundling multiple services. If
the retail component has sufficient scale and credit quality, then a separation
might make sense.
Outlook
We are pleased with the performance of the business so far
in 2019, and the outlook for the rest of the year remains positive. We are currently operating in an
environment where “main street” economic activity is strong and the threat of
an economic pullback in the near-term appears low. In addition, the impetus
for central banks to raise rates also appears to have waned, and thus we should enjoy lower interest rates for
longer. While our business generally performs well throughout all
investment cycles, low interest rates and steady GDP growth are particularly
good for us.
The results of the first phase of our capital recycling
initiatives are encouraging. In 2018, we
raised $1.1 billion from asset sales and redeployed the proceeds into five
exciting new businesses. Once we complete the second part of the Western
Canadian midstream acquisition and achieve a full period of contribution from
our newly acquired South American data center business and Indian pipeline, our results will fully reflect the benefits
of capital recycling. These benefits include higher organic growth
potential and greater diversification. Furthermore, we believe that after
removing the impact of foreign exchange, our second half 2019 FFO run-rate will
be approximately 22% higher than what it was at the time we sold our Chilean
electricity transmission business.
As previously noted, we are making good progress on our next
phase of capital recycling. We expect
this phase of the program to generate between $1.5 - $2 billion by the end of
2020, the proceeds of which will be reinvested into exciting new infrastructure
assets. We believe we will replicate the success from our most recent round
of capital recycling initiatives and create additional unitholder value.
We thank you for your continued support and look forward to
updating you further on our progress later in the year.
Sam Pollock,
Chief Executive
Officer,
May 3, 2019
