An old story, “Acres of Diamonds,” became popular thanks to a lecture by Earl Nightingale about a South African farmer who exhausted his entire net worth looking for diamonds. He had sold his farm to pay for his prospecting, and the buyer later discovered that the farm contained massive deposits of diamonds. The same storehouse of value is contained within the municipal, county and state communications networks in the form of wireless infrastructure.
Wire and fiber are being left behind as interpersonal communications, entertainment and information, data for transportation and services and even power delivery are rapidly transitioning to wireless technology. The ownership and management of the wireless infrastructure — macro tower sites, fiber and microwave back haul, small cells and data centers — are rapidly being consolidated by a few companies. Because of their size and footprint, these companies have built relationships with major regional and national wireless customers: broadband providers, broadcasters, utilities, and first responders.
These few companies’ relationships with the tenants, their revenue source, depend upon the size and coverage of their wireless infrastructure footprint. The consolidation of the universe of wireless infrastructure has passed its tipping point, because there is only so much wireless infrastructure left to acquire. During the past eight to 10 years, these companies have acquired privately owned infrastructure. Meanwhile, the larger companies are swallowing up the smaller companies. This activity is good for the infrastructure owners, because the feeding frenzy has driven values to an all-time high. It is good for the tenants, too, because they have the benefit of experienced, resourceful providers that can offer ubiquitous coverage.
This is where the diamonds come in.
All of the government-owned, expensive wireless infrastructure can be sold or leased to the private sector for record high values, providing municipalities and counties with significant capital to deploy as needed. By negotiating the right terms and conditions in the sale agreement, the government entities can continue to enjoy the same use of the wireless infrastructure as ever with little or no operating costs. Because of the timing of this transition from wireline to wireless technology, municipalities, counties and states can capitalize on the market frenzy by extracting significant value from their existing resources while still having the ability to use those assets for their unique needs.
Tom Engel is a director at Strategic Tower Advisors. The core business at STA is to represent tower site sellers or buyers. Engel’s email address is [email protected] Engel will be speaking at IWCE 2021 in Las Vegas on Sept. 28 at 4 p.m., together with Bob and Tom Duchen of River Oaks Communications. IWCE has set aside an hour for Engel’s session, “Acres of Diamonds,” as part of the conference’s funding track. Click here for details.
A number of factors in the business climate may come together to lower the prices (multiples) being paid for cell towers, according to Tom Engel, director, Strategic Tower Advisors. As a result, he believes now is a good time to sell your cell towers.
“This is not wishful thinking on my part to drive sellers into the market,” Engel said. “I would like to convince some of these older folks to sell their towers at the top of the market. They should get out now and take their profit. Values will be much lower in a year or a year and a half.”
Rising Interest Rates
Engel cites upward pressure on interest rates as a big factor. The Fed expects to hike rates three times in 2018 and may raise them more in the coming years if the economy continues apace.
“With record low unemployment and an expanding economy, upward pressure on rates, tower companies are not going to be able to pay current multiples,” Engel said.
Carrier Pricing Pressure
Another factor impacting multiples is the Tillman Infrastructure/Verizon/AT&T joint venture, which is designed to move carriers to nearby sites where rates and escalators are lower. He cites several instances where carriers appear to be determined to move rather than negotiate with its current site owner.
“One thing affecting several of my transactions is AT&T thinking about moving to build-to-suit sites, because they want to put more equipment on their sites, such as FirstNet. They don’t want an increase in rent,” Engel said. “For the last three years, carriers have threatened to move to adjacent towers, these guys are really doing something about it.”
While yet to be blessed by government regulators, the proposed Sprint/T-Mobile merger is already having an impact on tower brokerage, if only psychologically.
In the middle of a tower deal where Sprint, T-Mobile and AT&T were tenants, the price went down $400,000 when the Sprint/T-Mo merger was announced. “There is the belief that the Sprint/T-Mo merger will go through and many of Sprint’s sites will go away,” Engel said. “The same thing happened when Nextel left the market and MediaFlo before them.”
Beyond Sprint, the wireless industry has lost several broadband carriers over the years, including Cingular, Nextel, MediaFlo and Clearwire. Additionally, Engel predicts FirstNet will lead to a consolidation of government tenants, and 5G should diminish a good percentage of wireless internet service providers (WISP) tenants in secondary cities.
“The reduction in tenants has to impinge on the ability to get more money per existing site,” he said.
Engel is already seeing pressure on multiples that is informing his forecast. Multiples two years ago were in the high 20s to low 30s. Now, he is seeing multiples of 22X and below. Value multiple levels currently being paid for cable TV and broadcast stations are in the 6X-11X range, according to Engel.
“Lower multiples are a reality. Non-broadband tenant values have already begun to bottom out,” he said. “I am having trouble trying to get multiples in the range of 18X. I have a 16X offer for a tower I am brokering with 50 percent government and 50 percent broadband. My client is complaining that it is not 32X, but 16X is pretty good for any industry. I believe that we will see significantly depressed values of broadband sites in the next 18 months.”
Clayton Funk, MVP Capital managing director, said he is not seeing a change in tower pricing at this time with six active deals that are not seeing any downward pricing pressure.
“We are still selling towers for multiples in the high teens as well as into the 30s for very immature. newly built assets,” Funk said. “While certainly there is a risk the prices will come down due to the factors listed above, for towers that have tenant leases with amendment possibilities, we have yet to see any change in pricing.”
Alex Gellman, Vertical Bridge co-founder and CEO, agreed that it is a good time to sell, but he believes the tower market is still at its peak.
“I agree with Tom that it is a good time to sell towers if you got them,” Gellman said. “The market is pretty euphoric. People see the 5G shining tower on the hill and are hyped up about it. The public tower stocks are trading strong on Wall Street. The shortage of towers for sale is pushing up multiples, as well.”
While towers have a number of tailwinds, such as densification, unlimited usage plans and future 5G deployments, according to Gellman, there are also headwinds, including rising interest rates, carrier pricing pressure, and so far the lack of a clear revenue model that will drive rapid 5G deployment.
“With everyone positive and discounting the headwinds, there’s never been a better time to sell a tower,” Gellman said. If there is a dip in the tower market, it can rebound when the “new T-Mobile” begins spending $40 billion, as they announced, as well as the impact that a stronger T-Mobile will have on investments by AT&T and Verizon.
J. Sharpe Smith
J. Sharpe Smith joined AGL in 2007 as contributing editor to the magazine and as editor of eDigest email newsletter. He has 29 years of experience writing about industrial communications, paging, cellular, small cells, DAS and towers. Previously, he worked for the Enterprise Wireless Alliance as editor of the Enterprise Wireless Magazine. Before that, he edited the Wireless Journal for CTIA and he began his wireless journalism career with Phillips Publishing, now Access Intelligence. Sharpe Smith may be contacted at: [email protected]
Tower structure issues and problems with documentation and titles slowed the brokerage market in 2017, according to Thomas Engel, principal, Strategic Tower Advisors. Smaller transactions by relatively inexperienced sellers have also created a drag. However, the pipeline should open up in 2018 and land lease brokerage should be hot.
Strategic Tower Advisors closed only 10 deals in 2017, as opposed to 2015 when it closed 22. It finished the year with 24 transactions in the pipeline, either under contract or with a letter of intent.
“2017 was slow. Most of the tower companies we deal with are processing fewer transactions than a year ago,” Engel said. “The problem is the increased time it is taking to close a transaction, because of the ages of the towers being sold.”
To get older towers ready for sale, the cost of repair and deferred maintenance can be extensive and time consuming. The ground leases, some that date back to 1980s and as far back as the 1950s, may be expired or about to expired. Additionally, Engel is finding paperwork mistakes that have occurred when towers were assigned or transferred.
“As the tenants have merged over the years, the tenant leases, land leases and third-party agreements have become incomplete,” he said. “Much of the documentation is missing. Signature pages, exhibits, assignments and memorandums of lease are missing. Because banks are stricter now in terms of documentation, it is taking much longer to correct these errors.”
The titles for the towers can also be in disarray. “Checking the titles, we are finding bank loans that were paid off but were not taken off the title, and the bank is out of business. Some of the property owners may have died and no one ever cleaned up the title accordingly. Sometimes no one really knows who owns the property. It is in probate,” Engel said.
Publicity surrounding how much money carriers and the tower companies make has impacted the prices demanded to extend the leases for land under the towers. The expectations for more compensation are extending the brokerage process.
“Some of the land owners are very, very greedy,” Engel said. “Recently, we had one that wanted an increase from $200 a month up to $1,500 a month. We had another in Hawaii who wanted a percentage of the purchase price as a bonus to extend the lease.”
Most of the tower transactions, from 2010 to 2015, took about four to five months. Now it is taking, on the average, seven to eight months to complete a transaction. Engel expects the pipeline to open up in the first quarter of 2018 with around 15 closings.
“People are still buying towers,” he said. “In the last year, we saw a wrinkle in the pipeline.”
Strategic Tower Advisors gets the most responses when it sends out a request for proposal to potential buyers for broadband-only towers (80 percent), followed by broadband/broadcast or mixed-use towers (50 percent), broadcast/non-broadband towers (20 percent).
“Everybody wants broadband towers,” Engel said. “We are seeing multiples in the 18 to 24 range on mature sites and higher in new single-carrier sites. Broadcast multiples, on the other hand, have dropped 15 to 20 percent in the last year.”
Along with towers, the brokerage business has been busy with deals for the land under the towers. In the last six months to a year, an increased number of tower farms has come onto the market. Sometimes it is the family of a deceased owner selling the land under to three to five towers. Additionally, the public tower companies are moving to secure the land under all of their towers.
“The issue of land is going to explode in the next two to three years,” Engel said, “because all of these leases, some of which were signed in the 1980s, are about to expire.”
Three methods of determining the value of a telecommunications tower — asset value, business-use value and market value — may produce widely different results, according to Tom Engel. A co-director of Strategic Tower Advisors, Engel explained the differences and provided examples of tower sales figures that highlighted the effects of shifting trends in tower use when he spoke at the 2017 Network Infrastructure Forum, part of the International Wireless Communications Expo. He said that infrastructure, or the basic physical systems of a business or nation, such as ports, power generation and communication, is attracting investors’ dollars. “It’s really where all the money is moving in the stock market in the investor arena,” Engel said. In the wireless telecommunications business, towers and rooftops long have made up the infrastructure, with light poles, billboards and rights of way becoming increasingly important.
As a buyer, seller, adviser or broker, Engel has completed more than 200 transactions worth more than $1 billion. He is the founder of the Milestone Media brokerage, and at Strategic Tower Advisors, he is a cofounder with Jody McCoy.
The asset value of a tower, Engel said, is what it costs to build it or to replace it, and it has nothing to do with market value. “You can have a tower that costs $2 million to build, and if it generates no revenue, it’s not saleable,” he said.
The business use value of a tower has to do with how important it is to the conduct of the owner’s business. Broadcasters, cellular network operators and wireless internet service providers (WISPs) have to have towers — whether they own them or rent them — or they’re out of business. As with asset value, the business value of a tower has nothing to do with market value, Engel said.
The market value of a tower is purely the cash flow that the tower will, or can, generate in the future.
“In Alabama, I sold a 2,000-foot tower, equipped with an elevator, for $200,000,” Engel said. “It cost $2.5 million to build. I sold three telephone poles in California for $2.5 million. The steel itself doesn’t make a difference. What’s on it does.”
The tower companies really are not tower companies, Engel said, but more like specialized real estate companies, such as Marriott. They buy structures, they buy land, they buy billboards or whatever they could put something on to generate cash flow. “They’re buying the revenue flow — not the structure, not the assets,” Engel said. “The assets are simply incidental means to get there.”
Noting that the three public tower companies — American Tower, Crown Castle International and SBA Communications — have consolidated huge masses of towers and that a few of the other smaller consolidators, such as Vertical Bridge, invested $4 billion in the last two years acquiring 14,000 sites and 37,000 billboards from iHeart Media, Engel said the business is beginning to return to the days of cable franchising and pole agreements.
“With the internet of things and with 5G, people want to do the small cells,” Engel said, referring to mobile network operators. “One tower company has called itself a competitive local exchange carrier (CLEC), and they’re going to cities and demanding free use of their right-of-way because they call themselves a CLEC,” he said. “They’re being sued in several locations. Verizon and some of the big guys are going to the federal government trying to override this stuff so they can control the rights of way without local jurisdiction. Cities are scrambling to control the rights of way, their light poles and their power poles so they can get some revenue from the value of this network.”
Owners with towers as assets that they use as part of their businesses have several ways to make a profit from using those assets, which sometimes is referred to as monetizing an asset. Engel said many broadcasters do not like to get rid of their towers because they are necessary for their business. He said any one of the big tower companies would gladly buy the tower and give the broadcaster virtually perpetual use of that tower on a 100-year lease for free so they would have no operating costs, no insurance and no maintenance. In that way, the broadcaster monetizes the tower, and the tower company profits from renters that collocate antennas on the tower.
Alternatively, the tower company may pay the broadcaster eight, nine or 10 times what the broadcaster is willing to pay to lease back the tower, plus a higher multiple for the other kinds of revenue, Engel said.
Nothing to Fear
“People who own infrastructures that need it for their business shouldn’t fear monetizing,” he said “They’re getting value out of it by letting someone else really market the tower who knows what they’re doing. Between the 100,000 or 200,000 sites that the big guys have right now, they have almost a daily relationship with all of the carriers.”
Engel said there are four major carriers: AT&T Mobility, Verizon Wireless, T-Mobile US and Sprint. “When AT&T contracts your tower, it adds about a $500,000 value to it,” he said. “So, if you build a $75,000 tower and you add three carriers to it, you can sell it for $1.5 million tomorrow. Right now, broadband revenue is selling between 18 and 30 times cash flow. That’s 18 and 30 years worth of cash flow they’re going to pay upfront.”
Meanwhile, wireless internet service providers sell at about 12 times cash flow, Engel said. Government users sell at about 12 times to 15 times. Broadcast AM and FM users sell between 8.5 and 12 times cash flow.
The difference in the revenue has to do with many factors, and Engel said one of them is what he calls technological obsolescence. “In the 1980s, I sold a Little Rock, Arkansas, paging system for $1,800 per subscriber,” he said. “A year later, I couldn’t sell one for $50 a sub because paging just fell off a cliff, and the value of paging revenue fell off a cliff. If you have paging on your tower, it’s actually worth a negative one-to-one because a buyer knows that the paging system operator will stop paying his bills and that the tower owner will have to warehouse his equipment, send send him delinquency notices and hire an attorney to tell him to come pick up his equipment. The cost of removing the equipment and fighting the last part of the contract gives a negative value to the paging system as a renter.”
In a contrasting example of perceived negative value, Engel spoke of representing Hawaii Telecom when it sold five towers in Hawaii that had a negative cash flow of $250,000 per year. In the 15 months after the sale, the buyer added $400,000 in cash flow to the towers. He paid $30,000 for the five mountaintop sites that originally only the phone company could own because they were designated for utilities. Engel said the telephone company wouldn’t lease space on the sites to other users because they would have had to obtain approval from the public utilities commission every time. “The legal cost would have been more than the space was worth,” Engel said. “Once they sold the sites to a private party, it opened the floodgates and tenants were just pouring in.”
To ensure their future, Engel said tower companies are looking at other kinds of holdings. He said when Vertical Bridge bought towers from iHeartMedia, the company also bought the rights for 37,000 billboards. He said the Vertical Bridge parent company, Digital Bridge, bought Vantage Data Centers. It also bought a share of ownership in ExteNet Systems from SBA Communications.
Engel said the company he mentioned that would like to be known as a CLEC wants to put 120-foot poles in the rights of way that hold microcells or minicells.
“The cities should get money from this,” he said. “Cities, cable operators and broadcasters typically want to keep what they have, but they can monetize it. They can obtain a huge amount of front revenue and ongoing revenue share by taking these systems to the people who know how to manage them and run them, and maximize the value from them. That money can be used for buying more radios, buying more electronics, expanding the systems, improving the communications — that ability for the university, the city, the state or public broadcaster.”
Figuring a Bid
Most broadcasters pay more for insurance, maintenance, utilities and taxes on their towers than the tower operators do, Engel said. “When I figure a bid, cash flow is determined by ongoing revenue, less maintenance cost, less insurance cost, less tax, less monitoring cost and less land cost,” he said. “When I figure a bid, most of the tower companies are allowing me to plug a number in for insurance of $400 per tower per year, or sometimes as high as $500 or $600.
“When I bought nine towers in Canada myself, I was paying expenses of $1,200 to $1,500 a year per tower. I imagine that many broadcasters in our cities pay much more than that. The tower companies’ maintenance costs are lower because they have their own departments that maintain their thousands of towers, or they have sweetheart deals with contractors. Their overall costs are about $1,500 per tower per year, plus land costs and taxes. That’s what comes off of revenue to determine cash flow,” Engel said.
To figure expenses, Engel said the tower operators use an algorithm, but he does it by hand. He figures out what each tenant is worth in as a multiple of cash flow. He might value a local wireless internet service provider at 9 times cash flow, and the Federal Bureau of Investigation at 9 times. He creates a weighted average of the amount of revenue they contribute to the tower, multiplied by the cash flow, to derive a blended rate.
“For instance, I sold two single cell site towers in Napa Valley, California, for 37 times cash flow to SBA Communications last year,” Engel said. “That distorts the value because as soon as you add a second carrier, the multiple becomes half of that. If you buy a tower at 30 times cash flow and you put two two carriers on it, all of a sudden your multiple is 15 times cash flow. So, single-carrier site cash flows are distorted, but you’re seeing many deals in the range of 20 to 30 times cash flow for single-carrier cell towers because the buyers know they’re going to get a second or a third operator.”
The Consolidation Effect
The cable operators, including Comcast, Time Warner and Charter, are losing market share, Engel said. He said they know they need to be in the wireless communications business. He said that Comcast has talked about a 15-million-hotspot plan that would connect with a virtual network using the Verizon Wireless network to connect and to compete.
“Cox Communications has already invested heavily in InSite Wireless Group,” Engel said. InSite owns more than 1,000 towers. “Cox moved its towers into InSite and tried a couple of programs in Texas where they were going to sell their own phones. Charter is also looking at it. Google is looking at it. Apple is looking at it. Everybody wants to be in this business, and the money is huge.”
Engel said he wants to figure out a way to help communities maximize and even grandfather their relationship in, because once the federal governments preempts their control, their options will become more limited. With cable TV franchises, Engel said many cities were receiving more than 5 percent, and then the federal government limited it to 5 percent. Those who were grandfathered in were eligible to continue taking higher shares.
“I think cities and jurisdictions would be wise to look for ways to grandfather their value to the wireless network operators and figuring out someone they can work with,” he said. “There are a dozen good companies. When I started doing this for telecom towers in the early ’90s, one of my friends had the idea that the tower business needed consolidation. The three publics weren’t around, and we started buying up a few broadcast towers. Cellular towers sort of sprung up all over, and we realized that the cellular guys paid their bills. They paid a lot more money for the tower. The escalations were high. They had 25-year renewals, and that’s really where the business went.”
Investors favored cellular towers so much that Engel said most of the tower consolidators, such as today’s Vertical Bridge, Crown Castle International, SBA Communications and American Tower, have covenants in their credit facilities that mandate a high percentage of broadband revenue. Because of the covenants, when these consolidators buy large numbers of broadcast towers, they have to offset the purchase with enough revenue from broadband to cover their covenant.
“That doesn’t mean they can only buy broadband, Engel said. “When Pinnacle Towers went broke — and SpectraSite Communications almost did — the banks really went crazy because these guys bought a bunch of stuff and had predicted growth that wasn’t there.” He said that’s when the lending institutions insisted on the covenants.
Early on, tower owners only wanted to lease the land under their towers or perhaps to have an easement. Engel said land owners are becoming more aware of the value of the land under towers. He told of one such owner who asked for half of the money that a tower sold for in exchange for assigning the easement to the buyer. Engel talked about another land owner who receives a 90 percent revenue share from the tower owner for a cell site on Lanai, one of the Hawaiian islands. Lanai is the sixth-largest of the Hawaiian islands, and the owner bought most of it for $300 million in 2012.
A few years ago, enough companies came to understand the value of land beneath towers that they have made a business of buying that real estate, Engel said. Then, when the land lease came up for renewal, they would jack the rent up double or triple. “Lately, what the land owners have been saying is that the tower owner is welcome to leave,” he said. “They no longer want him there. They’ll just keep the tower and his tenants. There’s a real strong initiative on the part of the tower consolidators to begin to control the real estate. Up until a few years ago, they didn’t even want to own it. All they wanted was a lease or an easement. Now, they’re looking for ownership and control of that underlying land.”
By themselves, towers have little or no value. Because of ongoing operating expenses, they represent an ongoing liability. The value is all in the sustainable tower cash flow (TCF). Because of technological obsolescence and creditworthiness, different types of tenants have different value. These values are fluid and depend on multiple factors.
Tower cash flow is recurring revenue, less the actual costs for the transferred utilities, land and taxes, and the approximate annual cost of $1,500 per year for maintenance, insurance and monitoring.
The range varies because of capacity, loading, traffic, population, maturity, competition, creditworthiness, environmental sensitivity and potential capital requirements.
Earn-outs or revenue sharing of future income can be integrated into most transactions to allow sellers and lessors to benefit from future upside.
Source: Strategic Tower Advisors
Owners of tower sites, rooftops and other infrastructure who would prefer an ongoing revenue stream have many alternatives.
Owners and lessors can realize an ongoing 70 to 90 percent revenue or cash flow share from existing third-party tenants.
Over the next 50 years, as tenants churn and the professional tower company replaces them, owners can realize a 60 to 80 percent revenue or cash flow share from new tenant revenue.
If the owner prefers, the buyer or managing entity can pay a long-term flat monthly rent for the facilities with an annual escalator.
These revenue streams can be secured with a ground lease or access easement.
As an added benefit, the owner can include a provision to buy back the asset for $1 at the end of a long-term agreement.
Source: Strategic Tower Advisors
● Continue to use your assets for your needs without the associated operating costs
● Monetize the value with a large upfront payment
● Guarantee long-term cash flow from the assets
Don Bishop is the executive editor of AGL Magazine. He joined AGL Media Group in 2004. He was the founding editor of AGL Magazine, the AGL Bulletin email newsletter (now AGL eDigest) and AGL Small Cell Magazine.
A frequent moderator and host for AGL Conferences, Don writes and otherwise obtains editorial content published in AGL Magazine, AGL eDigest and the AGL Media Group website.