Infra-DIG: Investing in Digital Infrastructure

The dictionary definition of infrastructure - “the basic physical and organizational structures and facilities (e.g. buildings, roads, power supplies) needed for the operation of a society” - and the derivation of the prefix ‘infra-’ - meaning below or underneath, combine to give the word 'infrastructure' that reassuring solidity of something foundational, underlying, in which one should have some of a diverse portfolio invested. Investing in infrastructure has been on my mind for some time.

In 2019, spooked by the prospect of a potential Labour government in the UK intent on renationalisation (a prospect that came to naught in the subsequent December 2019 General Election), I sold the last remaining privatisation shares I’d inherited on my parents’ death – National Grid and Severn Trent.

Looking askance at the hefty premiums on which UK investment trusts investing in infrastructure traded, and reasoning that it might be worth exploring whether I could invest in digital infrastructure, I sought UK-listed vehicles in this field and found none.

Eventually I alighted upon Crown Castle in the United States. In essence a REIT whose income generating 'properties' are the wireless towers and 5G communications cells underpinning mobile communications devices in urban North America.

The investment was moderately successful with some uplift in both capital value and increased dividends over the eighteen-month holding period.

However, with a strengthening sterling and the ongoing deduction of what was a quite modest 3% dividend income due to US withholding tax, the recent announcement of not one, but two, London-listed IPOs of trusts investing in digital infrastructure caught my attention.

First to launch in February 2021 was Cordiant Digital Infrastructure which raised £370m at launch. Targetting an eventual annual dividend of 4p per share, but only 1p per share in the first year, for an income investor like myself this was trumped by the second trust to launch in the UK shortly thereafter: the Digital 9 Infrastructure Trust.

So, I have switched my Crown Castle holding to Digital 9, which is managed by Triple Point.

Two things make Digital 9 a more appealing income proposition than Cordiant: the proposed initial year dividend of 6p per share is to be mostly covered from the outset by the trust’s investment of £160m of the £300m raised in the March 2021 launch in a cash generative existing asset: Aqua Comms.

Aqua Comms operates one of the transatlantic seabed cables which carries data from the United States to Europe (and vice versa). 98% of the globe’s digital traffic passes through cables like these – you can’t get much more 21^st century infrastructural than that.

The ‘renters’ of space along these cables include corporate giants such as Facebook, Google, Amazon, who according to this company presentation (scroll down for video) are on lengthy inflation-linked contracts. 

With a pipeline of further assets to be invested in over time the income prospects of this trust seem quite bright. Interestingly, whereas Cordiant currently trades just below its £1.00 IPO price, Digital 9 has as of April 16^th, gently ascended to £1.02 in the two weeks since launching.

What could go wrong?

One of the appeals of digital infrastructure is that offers exposure to online traffic in general, without being directly exposed to some of the growing regulatory ‘interest’ in large online businesses. Of course, over time it may be that subsea cables attract the attention of tax-hungry governments - data taxes (?) tollgates at either end of the subsea cables (?).

There’s also the likely need for future capital raises (*) both to acquire further assets once the IPO proceeds are fully invested and to replace the fibre optic cables which have a 20-year lifespan. Whether a rise in interest rates might adversely impact such ‘long duration’ real estate assets is also a moot point.

That said, I look forward to the first quarterly dividend from Digital 9 in September 2021.

* Update 24th May 2021: As hinted in my original post, although more rapidly than I expected, Digital 9 has announced a placing seeking £100m to invest in further assets. Priced at £1.05, a discount of 7% to the 21st May closing price, the shares fell from £1.13 to £1.07 on Monday 24th May.