With site leasing revenue growth of 12 of percent, tower cash flow growth of 16 percent and AFFO per share growth of 22 percent, SBA Communications had a strong fourth quarter and increased its expectations for 2014.
Jeffrey Stoops, president and CEO, said, “Our U.S. business was very busy, with our wireless customers continuing the strong pace of equipment installation that we have experienced all through the year. With continued expected strength in organic growth and material portfolio growth, we are able to increase key elements of our 2014 Outlook. We are expecting another strong year for SBA in 2014.”
Amendment activity contributed more than half of incremental leasing revenue in the fourth quarter. Additional collocation leases contributed more than 40 percent of new leasing revenue, compared with 15 percent in the fourth quarter of 2012. The tower company’s leasing backlog remains at record levels.
“Interestingly, [collocations as a percentage of new leasing revenue] is down from the prior quarter. However, and very importantly, the absolute number of leases was up from Q3,” Jennifer Fritzsche, Wells Fargo senior analyst, wrote. “The percentage was down given the high amount of amendment revenue SBAC also continues to see.” Amendments are being driven by the efforts of AT&T and Verizon to increase the density of their networks, as well as to deploy additional AWS spectrum, she added.
AT&T and Verizon represented well over half of SBA’s new business in the quarter. Sprint continues its Network Vision project and has just begun its 2.5 GHz build out, and T-Mobile continues its 4G upgrade, although not in the 700 MHz band on SBA towers.
“We had a very busy quarter with respect to new leasing business,” Stoops said. “And we signed up another high number of both new tenant leases and amendments. Our customers are requesting larger equipment loads, which has a favorable impact on rate.”
During the fourth quarter of 2013, SBA purchased 2,138 communication sites for $321.1 million and built 119 communication sites. As of December 31, 2013, SBA owned or operated 20,079 communication sites. Total cash capital expenditures were $403.9 million, including $398.2 million for new tower builds, tower augmentations and communication site acquisitions.
“With respect to portfolio growth, we had another strong year, exceeding the high end of our portfolio growth goal in 2013. We’re off to a very strong start in 2014, and we anticipate exceeding the high end of our annual goal by the end of the first quarter,” Stoops said. “We will continue to look for additional opportunities certainly in our existing markets and potentially some new markets, although our preference currently is to stay in the Western Hemisphere.”
The U.S. tower market is the place to be for growth, Ben Moreland, CEO, Crown Castle International, emphasized in the company’s third quarter earnings call, which was called in the wake of its AT&T Tower purchase.
“With networks already supply-constrained in the face of broadband data growth estimates of 6x to 8x over the next four years, it’s very clear to us that the U.S. market is one where we will see significant growth in the years to come,” he said. “We believe that the U.S. market represents the most compelling risk-adjusted returns for capital investment in wireless infrastructure.” Only 4 percent of Crown’s total sites will be located outside of the United States.
As a matter of course, Crown Castle chose to invest $4.85 billion to acquire 9,700 sites from AT&T, which will bring its U.S. tower count up to 40,000. As well as underpinning its commitment to the U. S. market, the purchase feeds Crown Castle’s urban presence, with half of AT&T towers residing in the top 50 markets. After the sale, 71 percent of Crown Castle’s towers will be in the top 100 markets.
“These AT&T towers represent a unique opportunity to acquire a large, urban-centric portfolio and further our strategy,” Moreland said.
With the completion of the initial phase of LTE deployment, macro site collocation is now driving in the market, Moreland said. AT&T’s towers have an average of 1.7 tenants, which Crown Castle will try to increase by at least one tenant per tower.
“These towers are well positioned to accommodate the demand we’re seeing in the carriers’ network densification,” he said.
Jennifer Fritzsche, Wells Fargo senior analyst wrote in an equity research note that she senses a “major shift in focus toward densification.” One sign of that swing is the drop in amendments as a percent of leasing activity from 70 percent to 20 percent in the third quarter, year over year at Crown Castle.
“Consistent with our recent channel check findings, Crown Castle indicated it saw much new business from new cell sites as carriers (namely AT&T and Verizon Wireless) continue to densify their respective LTE footprints,” Fritzsche wrote.
Crown Castle has six tower acquisitions from domestic carriers and historically they have performed well. Tower purchases from Bell Atlantic/GTE Wireless, Powertel and Bell South have produced yields of 15 percent, 16 percent and 18 percent, respectively – well above their 4 to 5 percent initial yields. Moreland said he prefers carrier portfolios because of the consistent quality of the locations.
“We believe, like the value we have created from the five other carrier tower transactions we’ve done, we will continue to drive shareholder value through our operation of these [AT&T] towers,” he said.
Crown to Sublease Tower Space to AT&T
AT&T committed to an initial lease term of 10 years across all sites with multiple renewal options and monthly rent of $1,900 per site with an annual escalator of 2 percent. Subject to certain limitations, AT&T’s rent includes rights to limited pre-defined space on the transaction sites, similar to certain existing customer agreements.
Crown acquired the exclusive right to lease and operate the AT&T tower portfolio sites for an average term of 28 years with expirations ranging from 2032 to 2048. At the end of the term, Crown has options to purchase the sites outright for a total of $4.2 billion
The sale of AT&T’s towers was predicted Jonathan Atkin, RBC Capital Markets last spring. The drums are again beating for a sale, according to Bloomberg, which reported that TAP Advisors and JPMorgan Chase & Co. are working on the sale.
The sale of the AT&T’s towers is an obvious way for the carrier to raise cash to fund its network upgrades, said to have a price tag of $14 billion.
In March, Atkin estimated that a deal could bring in mid-$5 billion or more for AT&T’s assets which include 14,500 sites, assuming roughly $400,000 per site. The portfolio includes 10,500 wireless tower sites plus additional assets such as wireline towers, distributed antennas systems and other infrastructure.
“We believe the AT&T towers and related assets have a tenancy level of >1.5 and could generate total cash flow in the low- to mid-$200 million range, although this depends on the specifics associated with the potential sales/leaseback terms,” Atkin wrote in March. Other analysts put the cash generated by the towers at more than $326 million in annual revenues.
Possible buyers are probably limited to Crown Castle International, SBA Communications and American Tower, which just purchased Global Tower Partners for $4.8 billion and NII Holdings’ 2,790 towers in Brazil and 1,666 towers in Mexico for $413 million and $398 million, respectively. SBA Communications expanded operations in Brazil with 2,113 towers to the tune of $302.6 million in July and 800 towers for $362.8 million in December 2012.
Because of those acquisitions, Jennifer Fritzsche, Wells Fargo senior analyst, said SBAC and American Towers are too heavily leveraged or otherwise too busy at this time to purchase the AT&T towers. That leaves Crown Castle as the logical buyer, according to Fritzsche. It has been almost a year since Crown Castle purchased T-Mobile’s portfolio of 7,180 towers for $2.4 billion.
Wells Fargo analysts met with Sprint senior management and investors at its Kansas headquarters at the end of August and came away feeling the overwhelming presence of SoftBank, which paid $21.6 billion for a 72 percent stake on July 10.
“A consistent message was that both SoftBank and Sprint are focused on building a world class wireless network and company,” Jennifer Fritzsche, Wells Fargo senior analyst wrote in and equity research note. “The discussion at Sprint has clearly shifted from doing the least expensive option to a focus on aggressive network growth and expansion.”
Sprint’s spectrum holdings at 2.5 GHz and the Softbank relationship are crucial to competing in the LTE race, according to Dan Hesse, Sprint CEO, said during the carrier’s second quarter earnings call at the end of July.
“The Softbank transaction brings us capital and expertise that can accelerate our turnaround,” Hesse said. “We believe, with the combination of our existing network modernization efforts, the addition of the complementary Clearwire spectrum, and scale from the Softbank transaction, we can over time build a powerful network and a much stronger competitor.”
Sprint’s 2.5 GHz deployment has been slowed by DISH’s bid for Clearwire and will be pushed from late 2013 to 2014, Hess told the analysts.
“Sprint cited many examples of tangible network improvement it is seeing in areas where LTE/Network Vision has been launched (i.e. Chicago) but it does not expect to make a big marketing push on a national level until sometime next year,” Fritzsche wrote.
At the time the sale was closed with Sprint, Clearwire had 2,000 TD-LTE sites commissioned and a number of others under construction, which will become part of the Network Vision system in the second half of 2013.
“The hope (and plan) is that Sprint will have network parity vs. its peers in 2014 and a network advantage in 2015,” Fritzsche wrote.
Sprint launched a Novatel Wireless handset in July, which uses 2.5 GHz, as well as the 800 MHz and 1.9 GHz bands.
“As it relates to expanding LTE on 2.5 GHz, the Sprint Network plan will be to add the 2.5 gigahertz radios to our network to increase capacity and performance for our customers. And we expect to start seeing tri-band LTE smartphones later this year,” Steve Elfman, president, network operations and wholesale, said on the earnings call.
With all four major U.S. carriers making major network upgrades, tower companies continue to be the beneficiaries in increased leasing activity. Crown Castle saw revenue from additional tenants double in the second quarter, reflecting the shift in activity to in-fill sites collocation on small cells as well as macrocells, Ben Moreland, Crown Castle president and CEO, told the second quarter earnings call.
“This densification activity is the expected second wave of the LTE network deployment and provides us with a longer runway of expected future growth as carriers strive to improve network quality and to add capacity through cell splitting in the face of continued growth in mobile technology demand, he said.
The cellular industry is seeing a faster adoption of smart phones, compared with the initial uptake of 3G phones, which Moreland said the tower company uses to gauge where the industry is in the technology cycle, as well as the long term growth trends.
“To gain a framework for LTE build-outs, it is useful to compare how the 4G subscriptions is trending compared with 3G subscriptions historically,” he said. “From 4Q 2010 to the 3Q 2012, the first eight quarters of LTE, we have seen subscriptions significantly outpace the initial eight quarters of 3G, which began 1Q 2003.” LTE user growth could top 180 million by the end of 2013 and 260 million by 2017, he added.
Site rental gross margin, adjusted earnings before interest, taxes, depreciation and amortization (EBITDA) and adjusted funds from operations (AFFO) for the second quarter all exceeded Crown’s expectations, according to Jay Brown, Crown Castle’s chief financial officer.
“As a result of our strong results in the second quarter and the significant increase in new leasing activity, we have increased our full year 2013 outlook, which now suggests annual site rental revenue and AFFO per share growth of 17 percent and 35 percent, respectively,” Brown said. “In addition, we continued to invest in activities we believe will maximize long-term AFFO per share, including purchases of our common shares and the construction of small cell networks.”
During the second quarter of 2013, Crown Castle invested $101 million in revenue-generating capital expenditures, including $66 million on existing sites and $35 million on the construction of new sites, primarily small cell networks. Additionally, acquisitions accounted for $14.5 million in capital expenditures.
“CCI’s report is significant in our view in that it should set the tone for the other tower companies’ (AMT and SBAC) reports to follow. As we have written, we continue to believe the overall tone of these reports will reflect a bullish outlook regarding domestic wireless spending,” Jennifer Fritzsche, senior analyst, Wells Fargo, wrote in an equity research note.