Just before Christmas, American Tower received his biggest present of 2020, closing on its acquisition of InSite Wireless Group for the sum of $3.5 billion. The purchase was funded by a combination of cash on hand and revolver borrowings.
Tom Bartlett, American Tower’s CEO, said in a prepared statement, that the transaction will be immediately accretive, and he expects to quickly begin driving new leasing activity on the assets.
“As 5G densification initiatives in the United States accelerate and network deployments in international markets continue, we believe we are well positioned to generate attractive, sustainable long-term growth, including on these new sites, while playing a key role in enhancing mobile broadband connectivity,” he said.
American Tower expects the assets acquired from InSite to generate $150 million in property revenue and approximately $115 million in gross margin in 2021.
American Tower’s recently minted master lease agreement is not only good for the tower company, but good the tower industry, Rodney Smith, SVP, American Tower’s corporate finance & treasurer, said in his conversation with Batya Levi, UBS Investment Bank, at the UBS Global TMT Conference, this week in New York City.
He noted the MLA that the tower company signed with AT&T defines a longer commitment by the carrier. Previously, AT&T had voiced its displeasure with American Tower’s leasing terms and has gone out of its way to have companies who build them new towers agree that they never be sold to a public tower company.
“The deal with AT&T really increases their level of commitment on our towers,” Smith said. “Our committed order book of revenue has gone up from $34 billion up to about $46 billion, primarily because of this deal. So that — in a way, you look at that as kind of an extension of all these sites. It’s really a longer-term commitment, which we think is really good for us, and it’s good for AT&T.”
Within that deal, AT&T now has certain use rights on American’s towers, and it doesn’t have to go through an individual application process every time it wants to work on a tower. So the administrative side of amendments and collocations has been streamlined and the payment mechanism is simpler for AT&T and more predictable for American Tower.
“I think it’s good for the whole industry, where the tower companies and the telecoms really work together to make sure that all this infrastructure that exists is utilized and accessible and efficiently used by all the carriers,” Smith said. “We price it out. We do discounted cash flows. We figure out what it’s worth, and we make the payment mechanism much simpler.” However, he added that the 3 percent escalator, which has caused consternation, is still in place.
Smith talked about other bright spots on the horizon. As it waits to obtain mid-band spectrum, Verizon will probably engage in additional cell-splitting to increase system capacity. But mid-band spectrum, when it is rolled out, will be used for 5G with equipment deployed from macro towers in suburban and rural areas: good for the public tower companies.
“And when we get into mid-band spectrum deployment cycle, that certainly is something that the tower companies would monetize,” Smith said. Another opportunity brought on by 5G will be massive MIMO antennas, he added.
Although it has deployed around 500 outdoor small cells, American Tower is still not interested in deploying and owning small cells, because the return on investment is not big enough. Plus, the technology risk demands an even higher RoI.
“When I think of small cells, it’s not like towers,” Smith said. “When people in this industry talk about small cells, what they’re really talking about is fiber backhaul. So the infrastructure companies provide the fiber backhaul to the small cell, and they provide the services work to deploy the small cell, but they don’t own any real estate where they’re renting that space to the carrier to place the small cell.” Additionally, fiber deployment is so competitive that returns are even going down further, he added.
However, American has 350 in-building fiber-fed small cell network deployments in premier building locations, such as Las Vegas casinos, high-end malls and NASCAR racetracks, which do fit into its business model.
“If there’s a place where we have dedicated, dense occupancy, even though it may be for a short time, like at a sporting event, the cost of the networks is much more realistic,” Smith said. “You’ve got a dedicated customer base in that building, because you might have 60,000 people going to a sporting venue. That means the carriers really do want to cover it. So, if you build it, you’ll get one, two carriers, maybe three. So we do see the lease-up in that model.”
American Tower has seen organic growth of more than 7 percent this year and the good times will keep on coming in 2019 and beyond, Igor Khislavsky, senior director, investor relations, said in an interview with Batya Levi, analyst with UBS Securities, at the UBS 46th Annual Global Media and Communications Conference 2018, Tuesday in New York City.
“The trends that are supporting our growth levels this year are inherently multi-year in nature. For example, AT&T is doing one-touch with FirstNet, and they are one-third of the way through,” Khislavsky said according to Seeking Alpha transcript. “From that respect, our expectation is there will be continued strong growth in the United States.”
American Tower has been growing at industry leading rates all year, because the tower company has been able to effectively monetize the growth of all four carriers.
“We spend considerable effort internally to model out the builds carrier by carrier. We expend quite a bit of manpower to be in position to capture the activity in the marketplace,” Khislavsky said. “If you look at, not really, this year, but the last couple, we have consistently had the lowest churn rates in the industry. We have consistently had solid growth rates that lead the pack. That is a reflection of our positioning.”
While the tower company has had much higher volume in 2018, the activity isn’t fundamentally different from previous years. Amendments still account for 70-75 percent. Carriers are putting more equipment, because of the number bands that are being deployed simultaneously, increasing the loading, the weight and the size of the footprint, as well as the amount paid to American Tower.
“We have been on the historically high end of the cost for an amendment,” Khislavsky said. “In the past, amendments have ranged from $200 up to $1,500. We have been in the $1,000 ballpark.”
Khislavsky was upbeat about the pending Sprint/T-Mobile deal. American Tower is “net neutral to net positive,” because the carriers have promised a lot of capex spend building out 5G if the deal goes through.
“The question is whether the competitive dynamics of having three carriers rather than four encourages incremental spending across the board,” Khislavsky said.
The overlap between the two carriers in American Tower’s tower portfolio is 4 percent of total revenue today and by the time the leases expire in three years, it will be lower as the business continues to grow. Khislavsky promised a “constructive” approach to potential churn.
“Concerning the 25,000 [net] sites that will be decommissioned, we are making sure we are offering them as much flexibility as possible from a contractual perspective,” he said. “We want to achieve a happy medium in terms reducing some of the churn risk, capturing some of the upside of some of the deployments they are planning.”
CBRS Offers Opportunities
On a lighter note, Khislavsky discuss American Tower’s involvement in the Citizens Broadband Radio Service, CBRS Alliance and its investment in Federated Wireless which is developing the technology for spectrum sharing. CBRS could potentially allow the addressable indoor wireless market to move beyond the major venues and increase American Tower’s market share.
“So we’re exploring that. It’s early stage at this point, but we’re excited about the opportunity,” Khislavsky said. “It could be a way for us to grow our indoor business from the 2 percent to 3 percent that it represents today and maybe to a slightly higher level.”
Another spectrum opportunity for wireless is in C-Band, which the FCC is currently investigating. Khislavsky said the mid-spectrum is interesting because it combines propagation characteristics of the millimeter wave spectrum with characteristics of lower band spectrum.
“I think our view is that a significant portion of that spectrum ultimately gets deployed on macro sites, which should benefit us, but that’s probably a couple years out,” he said.
American Tower Eschews Fiber-backed Small Cells
Small cells are the hot topic right now. However, the long-term return on investment involved in fiber-backed outdoor small cell business still doesn’t make sense for American Tower, because of the upfront cost to acquire the fiber, the opex costs and high levels of churn that enterprise fiber businesses. The towerco prefers the returns that it is getting in macro towers internationally.
“There are pretty decent returns in that type of business, but the numbers don’t justify us deploying that incremental dollar or capital versus the other options that we have,” Khislavsky said. “We can deploy capital not only in the U.S. but also throughout the 17 markets in which we operate.”
April 27, 2017 —
American Tower reported strong growth in the U.S. market in the first quarter with an increase of 6.5 percent in organic tenant billings.
“We saw particularly strong results in our largest core market, the U.S., where our 6.5 percent Organic Tenant Billings Growth was the highest we’ve seen since the second quarter of 2015, supported by a recently amended master lease agreement with one of our tenants,” Jim Taiclet, American CEO said.
Capital Expenditures during the first quarter of 2017 stood at $177 million, of which approximately $24 million was for non-discretionary capital improvements and corporate capital expenditures. During the first quarter, the company spent $512 million to acquire nearly 2,500 sites in France. Additionally, it acquired 1,400 sites in Paraguay from Millicom International Cellular’s subsidiary.
Wireless infrastructure catalysts, such as unlimited plans at Verizon and AT&T, the FirstNet award, visibility into AWS-3, WCS, and 600 MHz deployments, have investors on the U.S. bandwagon, according to Nick Del Deo, MoffettNathanson.
“Just a few months back, few people would have guessed that the U.S. would be the star of the show in 2017. But here we are,” Del Deo wrote in a research note. “Truth be told, the U.S. has always been the star of the show. Aside from its sheer size, that’s because the U.S. tower market rates much higher than just about every other tower market on one absolutely critical dimension: pricing power. In real terms (i.e., inflation-adjusted), the domestic segment has grown at essentially the same pace as American Tower’s international portfolio over the last several years, despite U.S. growth being pressured by AT&T’s pullback in leasing activity and the leasing environment overseas generally perceived as being far more robust.”
Expectations for Full Year 2017 Increased
American Tower is raising the midpoint of its full year 2017 outlook for property revenue, net income, Adjusted EBITDA and Consolidated AFFO by $105 million, $30 million, $70 million and $55 million, respectively, as compared to the company’s 2017 outlook, as updated on March 21, 2017.
“Further, given the recent conclusion of the 600 MHz auction, the numerous other spectrum assets yet to be deployed and several other potential catalysts, we believe that our portfolio of over 40,000 U.S. sites remains optimally positioned to drive strong organic growth over the long term,” Taiclet said.
March 21, 2017 —
American Tower updated its outlook today, filing a Form 8-K with the Securities and Exchange Commission.
After giving its full year 2017 outlook on February 27, 2017, the tower company amended a master lease agreement with one of its tenants and now expects at least $100 million in additional straight-line revenue for the year. It now expects total property revenue, net income and Adjusted EBITDA in the range of $6,310 million to $6,490 million, $1,275 million to $1,345 million and $3,910 million to $4,010 million, respectively. The tower company also plans to purchase an additional $1.1 billion of its common stock.
Jennifer Fritzsche, senior analyst, Wells Fargo, saw the increased outlook as a sign that wireless infrastructure deployment is increasing and is consistent with her firm’s recent upgrade for towers.
“We suspect this is U.S.-based activity and our guess is it likely involves one of the largest two carriers (AT&T or Verizon). If we were to speculate, our belief is this could be more related to Verizon activity given it had a holistic MLA with AMT in the past,” she wrote. AT&T is expected to increase spending on the towers once it receives confirmation on FirstNet contract.