OTTAWA — Allied Properties Real Estate Income Trust is putting a critical piece of Canada’s internet infrastructure up for sale because it wants the money more than it wants to be in the data-centre business.

“To be quite honest, I’m terrified,” said Dan Armstrong, CEO of the Toronto-based independent internet provider Beanfield Metroconnect, and one of the principal tenants of the unit Allied wants to sell.

“We have significant assets in all of [Allied’s] buildings. Depending on who the buyer is, if they have a slightly different business model, that could have a serious impact to our business,” Armstrong said.

That portfolio on the market comprises three major internet switching sites in downtown Toronto, including the crown jewel at 151 Front St. W., plus closely connected properties at 905 King St. W. and 250 Front St. W. Allied calls them just by their numbers in many corporate documents.

“151 is analogous to a massive interchange on an intersecting series of super-highways. It is exceptionally valuable and very difficult to replicate,” Allied’s latest quarterly report said in October. Though they’re blocks apart, 151 is lashed to the other two buildings by a “multilayered, diverse infrastructure of high-density fibre,” the report said.

Uncertainty about whose hands the properties will end up in has some people, like Armstrong, worried that one of their competitors—or a company with different business priorities from Allied’s, or a foreign interest—might buy the centres.

In the 1950s, 151 was built to house Canadian railways’ telegraph equipment. Over the years, as copper gave way to fibre optics and Morse code to binary, regular upgrades—massively redundant power supplies, elaborate cooling systems, Fort Knox-like security measures—turned it into the most important nerve centre in Canadian telecommunications.

Allied bought it for $192 million in 2009. Today, 151 Front and its nearby sister sites are neutral ground where service providers like Bell, Rogers and Telus (and smaller but consequential players like Beanfield and TekSavvy) connect to each other, so an email sent from one can get to another.

The linked sites are the core of a “peering” network where companies with immense connectivity needs—like the big banks and insurance companies, Amazon, Facebook, Akamai, Blizzard, Tencent, the CBC, J.D. Irving and Magna—link up with each other.

The key facilities within 151 Front are its “meet-me rooms” where this actual internetworking happens.

“These are the tables at the farmers’ market where you put all of your wares,” Armstrong said. “Everyone can sell to everyone. And that’s what’s made that building so valuable—because that’s where telecoms meet each other.”

The participants also typically have equipment in leased suites elsewhere in the building, routing traffic and doing processing that demands the shortest delays.

“It’s certainly the most carrier-dense facility in all of Canada,” said Todd Coleman, CEO of Montreal-based eStruxture, a data-centre company and another tenant at 151. Data centres are hot business, he said, as the permanent effects of the COVID-19 pandemic on business continue to work out.

But data centres aren’t Allied’s core operation, which is leasing offices, the company’s announcement of its sale plan said. By selling them, “we want to supercharge our balance sheet and reduce our dependence on the capital markets,” CEO Michael Emory said in the statement. He didn’t respond to follow-up questions from The Logic.

In its last quarterly financial report, in October, Allied valued the three buildings together at slightly under $1.3 billion—with 151 Front St. W. accounting for the bulk of that—and said they’d produced just over $16.1 million in net income.

Proceeds from a sale would go a long way against Allied’s net debt of nearly $4 billion. Much of it is at interest rates below four per cent, and unlikely to be renewable so cheaply as it comes due. 

Allied is the landlord but much of the connecting within 151 Front and its sister sites is mediated by a non-profit called the Toronto Internet Exchange, or TorIX. The exchange—which operates in three sites, two of them currently belonging to Allied—sets technical standards for companies that want to join its list of peers that want to link and be linked to, making the process simpler.

TorIX’s chair, Kevin Blumberg, is more serene than Armstrong about the impending transaction. TorIX has worked with three owners at 151 Front St. W. since forming in 1997, he said, and the sheer number and scales of the occupants there makes the location very sticky. “As long as the status quo is maintained, everybody’s happy,” he said.

But he acknowledged Armstrong’s worries.

“If the change is down the road where the pricing becomes difficult, I think is one way to say it, then people will naturally migrate from that location,” Blumberg said. “We’ve seen this in other markets, where a facility either changed ownership or a facility was not maintained to the same level.”

Supply, demand and the market will sort things out for the best, he said, though the sorting could be painful and expensive, especially for a comparatively small company like Beanfield.

Blumberg said he hopes the buyer will be a company that’s well versed in operating sophisticated technical sites. “There’s a huge amount of power and cooling that goes into a data-centre facility,” he said. “It’s not your average office building.”

Besides Beanfield, Allied lists its data-centre unit’s major customers as Bell and three U.S.-based data-centre companies: Cologix, Digital Realty and Equinix.

Any of them might have the expertise Blumberg talked about, though he said one of the advantages of Allied’s ownership has been that it’s essentially a realty company, not a data-centre company—it hasn’t competed with any of its own customers.

The way Allied has run the operation, Armstrong said, all the farmers pay for their tables and then get to sell and buy freely at them. “In the U.S., a lot of the people that operate these buildings get greedy, and they want a little piece every time you sell a cucumber,” he said.

Armstrong hopes the buyer will be an institutional investor, like the Canada Pension Plan’s infrastructure fund or its equivalent at OMERS, and that it’ll keep running the internet exchange the way Allied has.

(Through a spokesperson, OMERS declined to say whether it has any interest in Allied’s portfolio. CPP Investments did not respond to an inquiry.)

“It is, without a doubt, the most important telecommunications facility in this country,” Armstrong said. “And I think that it would behoove all Canadians to make sure that it remains in the hands of somebody who’ll operate it in a neutral capacity.”

The Logic asked for Industry Minister François-Philippe Champagne’s views on the sale. His office punted the questions to his department’s bureaucratic side, where spokesperson Justin Simard noted that the Competition Act, Telecommunications Act and Investment Canada Act give the government various regulatory powers.

“Market forces have been the main guiding force of the internet for many years, with companies buying and selling network assets to best serve their customers,” Simard wrote. “Private sector investment has made major contributions to the development of the internet and the infrastructure.”

Bell, for one, has extracted itself from the data-centre business fairly recently: Equinix, a California-based investment trust focused on internet connectivity and data centres, bought Bell’s data-centre business in 2020 for just over $1 billion as Bell sought to “focus on investment in networks and service innovation.”

Coleman said he’d put Equinix at the top of the list of potential buyers, though Canadian competition law might get in the way of a purchase by a player that large.

(“Equinix does not comment on market speculation,” company spokesperson Barbara Trevisan told The Logic in an email. Cologix did not respond to an inquiry. Digital Realty acknowledged The Logic’s questions about its potential interest but did not answer.)

Another possibility Coleman raised is that an infrastructure investment fund will buy the buildings, with an arrangement with a data-centre company to operate them.

“I suspect there’s a lot of infra money that’s probably talking to industry players and management teams to figure out whether they can go run at it, and make good work of it,” he said.