Despite the 5G talk, investment in LTE will see plenty of runway in 2019, which is leading to more new tower builds, tower executives say. T-Mobile is building coverage sites for its low-band 600 MHz and 700 MHz spectrum, and AT&T is contemplating a network improvement project as well as its FirstNet-related project. Both of which involve ample new sites, Alex Gellman, CEO, Vertical Bridge, told AGL eDigest.
“We are in a renaissance period for good old macrotowers in the next few years ahead of 5G,” Gellman said. “The reason I feel that way is we are seeing a lot of rings for new towers. The economics and speed of collocations is hard to beat, but there will be new builds as well.
Ron Bizick, CEO, Tarpon Towers, described the new-build business as “vibrant.” It is bringing good times to the independent tower companies.
“There are a lot more towers being built in the rural areas to fill out the white spaces, particularly for AT&T’s FirstNet,” he said. “We are seeing the other carriers build out their coverage, as well. We have targeted some rural areas where we think a second tenant is possible, but only a second tenant.”
With that said, carrier capital expenditures are a quarter-by quarter-question mark. In the first quarter of 2019, tower owners will be looking closely at the capex budgets of AT&T and Verizon after the Big Two pulled back on their spend toward the end of 2018. AT&T’s reduced capex came after the Time Warner deal closed and Verizon shaved $1 billion off its guidance after announcing 44,000 in layoffs last year. Additionally, Verizon had a $4.6B write down of Oath (Yahoo and AOL).
“They pushed capex out at the end of 2018. Was that a trend or a one-time occurrence?” Gellman said. “The layoffs and the write down may be a signal a greater focus on the network in the future.”
Last year’s big story, the Sprint/T-Mobile merger, is carrying over to this year. It was bad news for some tower companies, which saw Sprint business go away after the deal was announced. Gellman believes the quiet surrounding the deal is a portent for its blessing from the Department of Justice. In the long run, he believes the merger will be positive for the industry.
“Sprint has not spent on its network in a meaningful way for a number of years, while T-Mobile has been very aggressive,” he said. “A stronger, larger T-Mobile will be excellent for our industry. T-Mobile is solely focus on its network, while AT&T and Verizon have other places to put their capital and have sometimes invested elsewhere than in the network. If T-Mobile is the same size as AT&T, it will be more difficult for it to do that.”
Jennifer Fritzsche, senior analyst, Wells Fargo, believes the Sprint/T-Mobile merger will go through in the first half of 2019. “Our regulatory checks suggest that the DoJ/FCC approval process has been relatively drama-free thus far,” Fritzsche wrote in an Equity Research note. “We do, however, believe that T-Mobile will have to divest assets – most likely spectrum – to receive approval. The New T-Mobile plans to create a more scaled, viable competitor to AT&T and Verizon, and help turbocharge the carriers’ push to 5G.”
Towers Still a Wall Street Darling
Fritzsche has written that the towers will be remain a compelling investment for shareholders 2019, despite the possible Sprint/T-Mobile merger. Tower stocks beat the S&P index in 2018 (+4.9 percent vs. S&P -6.2 percent), and in 2017 (+40.4 percent vs. S&P +19.4 percent).
“Even with these recent moves, we believe towers will remain very topical in 2019,” Fritzsche wrote. “In our view, there exists a number of tangible catalysts (i.e., FirstNet, T-Mobile’s 600 MHz deployment, 5G densification efforts, edge computing, etc.), which should more than offset expected choppiness in international markets (particularly India) and impact from carrier M&A (namely Sprint and T-Mobile) in the short term.”
Carrier leasing activity, which has grown year over year in recent quarters, is expected to continue to increase in the coming 12 months, according to Fritzsche.
“There is much ‘naked spectrum’ that has yet to be deployed (600 MHz, FirstNet 700 MHz, AWS-3, WCS, 2.5 GHz, mmWave, etc.) – where towers will clearly play a role,” she wrote. “Most deployments are part of multi-year strategies designed by the carriers and complement what they plan to build for densification needs ahead of 5G technology rollouts.”
States opting in for the First Responders Broadband Network (FirstNet) surged past the halfway point earlier this month, with the addition of Pennsylvania, Oklahoma and Utah. Even with the momentum FirstNet is gaining, the tower industry is still uncertain of when or where the buildout will occur.
For now, 29 states and two territories have signed on. States that haven’t already opted in have until Dec. 28 to make their decisions.
With an opt-in decision, first responders can begin signing up for service, and thousands of connections on the network. First responder subscribers will have priority access to interoperable voice and data across the existing nationwide AT&T LTE network.
Both AT&T and FirstNet have committed resources to improve public safety communications. With each opt-in decision, FirstNet and AT&T bear the financial risk associated with the network build in that state or territory. FirstNet will also drive public-safety-focused infrastructure build out first on existing towers through modifications and then through collocations. And eventually through new builds.
“We expect to hit the ground running and issue work orders in January after the opt-in period closes. We’ve already committed more than $200 million in capital to the project in preparation for its start,” John J. Stephens, AT&T CFO.
“The needs of public safety demand more than what commercial offerings provide today. FirstNet will be a force for good, forever changing the way first responders think about and use communications,” said Chris Sambar, senior vice president, AT&T – FirstNet.
The 31 states and territories that have opted in, including Alabama, Montana, Alaska, Nebraska, Arizona, Nevada, Arkansas, New Jersey, Hawaii, New Mexico, Idaho, Oklahoma, Indiana, Pennsylvania, Iowa, Puerto Rico, Kansas, South Carolina, Kentucky, Tennessee, Louisiana, Texas, Maine, U.S. Virgin Islands, Maryland, Virginia, Michigan, West Virginia, Minnesota, Utah and Wyoming.
“We’ve had a tremendous response [to the FirstNet opt-in process] so far. Already, 31 states and territories have opted in, and we are just a month into the 90-day opt-in window,” Stephens said.
AT&T must meet a timeline of 20 percent geographic coverage annually starting in April 2018, until it is finished.
“So we do think this is going to be constructive to the tower industry next year and for many years to come,” James Taiclet Jr., American Tower president, CEO and chairman, said in a Q3 2017 earnings call. Daniel Schlanger, American Tower CFO, also expressed his optimism about the potential for growth associated with FirstNet.
Smaller Tower Companies Less Optimistic
During the AGL Local Summit in Fort Worth last month, Ron Bizick, CEO of Tarpon Towers, said that FirstNet is currently the biggest catalyst for growth on the horizon for towers but the speed of the process has not been without some frustration. The large public tower companies stand to benefit the most, he added.
“It is slow coming. We all expected more activity sooner, but it is coming,” Bizick said. “From a revenue standpoint, Crown Castle International will benefit the most, because they have the AT&T portfolio, followed by the rest of the public tower companies. You can kill the most birds with one stone by going to the [bigger tower companies], if you can get a good deal done.”
Bizick has seen applications for tri-band antennas that would utilize the AWS, WCS as well as FirstNet frequencies. “What that suggests is that AT&T, true to its mission, is going to deploy one time, one truck roll,” he said. “It looks like they will have equipment deployed in the field ready to be turned on when a state opts in.”
AT&T plans to roll out FirstNet service to around a total of 45,000 towers, with 15,000 seeing new equipment in the first five year. There will be plenty of room for negotiation between AT&T and the public safety agencies concerning where that buildout occurs, according to Bizick.
“The public safety agencies will want coverage where they current don’t have it, and AT&T wants to deploy coverage where they don’t have to build towers,” he said. “I think the mixture should include coverage where there it currently is not available to public safety.”
Bernard Borghei, co-founder of Vertical Bridge, sees FirstNet as the last, best hope of getting broadband wireless deployed in rural areas. Collocating on existing towers will be essential for AT&T to achieve a return on its invest on its investment.
“A lot of us have rural towers and there is the possibility for a partnership there. We have a healthy relationship with AT&T. It is a timing issue. How aggressive they will be; how fast they will deploy; I don’t know,” Borghei said.
Collocating FirstNet Antennas May Not be That Simple
Not surprisingly, the FirstNet antennas covering multiple spectrum bands are bigger than the LTE ones.
“They are trying to go with one antenna per sector. Under Rev. H [of ANSI/TIA 222), the new tower engineering standard, a lot of the mounts are going to be stressed with the FirstNet antennas,” Borghei said.
Tony Peduto, CTI Towers CEO, said AT&T is looking for additional height beyond the standard 10 feet in the FirstNet rad centers, which may lead to reconfiguring the tower. He was not confident, however, that the Dec. 28 deadline for states to opt-in would hold.
“You have Oregon and Washington with a joint RFP out there which is due in mid-November. With the holidays, I think you are going to see an extension of time granted for states to opt-in as they try to figure it out,” he said. “It’s a tailwind. Just a matter of when.”
States opting out could lead to a FirstNet network with multiple providers, Peduto said
“A network will be built, but it may mean multiple players. Verizon has gone to states and lobbied them to build their network. Ultimately you are still going to need interoperability across the country, even if has Verizon in Washington state and AT&T in Oregon. I am not sure what it will look like in the end.”
January 7, 2016 — Because of the new economics of providing wireless services, carriers no longer believe the current tower leasing model is sustainable, which may lead to a divergence from the traditional business model for renting space on towers, according to some in the industry.
“As the wireless industry continues to mature and carriers increasingly compete on price, revenue growth has slowed and profit margins have been squeezed. Carriers’ costs have increased due to the rapid growth in spectrum prices, tower rent escalators and tower rent increases related to the rollout of new technologies,” said Ronald Bizick II, CEO, Tarpon Towers.
As a result, carriers are looking to change the traditional tower leasing model in order to control their costs and align tower owners’ interests with their own.
“Carriers may be somewhat stuck with their current and legacy deals with both big and small tower companies, but I expect to see the carriers increasing downward pressure on rents and escalators on both new collocation and BTS leases,” Bizick said. “I think we are on the verge of the next great inflection point in the evolution of tower ownership and leasing.”
Wells Fargo Securities has done some research that has shown that AT&T is attempting to move some towers to secure lower rates.
“While we believe this is unlikely to happen, it seems to us that AT&T is showing a bit more ‘muscle’ with the tower companies these days,” Managing Director Jennifer Fritzsche wrote. “This begs the question: if AT&T begins to push back, will Verizon likely follow? A large portion of the tower companies’ recent growth has been driven by amendments. If the two largest wireless players begin to challenge these economics, it could impact the tower companies’ top-line growth rates.”
Alex Gellman, CEO, Vertical Bridge said the pressure on escalators from the carriers is only logical considering the economic environment. The tower industry needs to make adjustments accordingly.
“The more efficient the tower industry can be, lowering our costs, the better. That will allow us to help them address their costs,” he said. “Fundamentally, we are in the real estate business. If you have good locations, they will pay reasonable rent and stay a long time.”
The extent to whether the carriers can be successful in changing the tower leasing business model is not an issue in the short term. In the long run, however, the evolution of the tower leasing model could have a profound impact on tower companies, especially public companies.
May 7, 2015 — Having sold the majority of its towers in October 2014 and paid back its original investors, Tarpon Towers has secured new funding and is looking to start over building another cell tower portfolio. But this time there is a twist. This round of financing highlights a shift in capitalization strategy as Tarpon reduces the cost of its capital and increases its investment horizon.
Tarpon II was recently formed by Tarpon Towers’ management with a $60 million equity commitment from Redwood Capital Investments and Tarpon’s management team and a $40 million credit facility from a regional bank.
Ron Bizick II, CEO, and Bill Freeman, president, co-founded Florida Tower Partners in 2008, which was later renamed Tarpon Towers, and received venture capital from ABS Capital Partners in 2009 and from Spire Capital Partners in 2010.
“ABS and Spire were private equity investment groups with the typical higher return on capital expectations that you find with such groups,” Bizick said. “They were great partners and everyone was pleased with the returns. We invested more than $85 million of capital together. However, all good things do come to an end, and as is the case with private equity funds, the fund eventually must return capital to their investors.”
Since inception, the company has built or bought more than 250 towers and sold them off in three separate transactions to American Tower. ABS and Spire exited the Tarpon investment with the final tower sale last October.
As Tarpon contemplated its next round of funding, it began looking for a longer term investor with a lower return on investment threshold. It looked at sovereign wealth funds, infrastructure funds and family office type funds.
“We had a number of options but given our current size and strategy we decided a family office investor would be the way to go and chose Redwood Capital Investments,” Bizick said. “They have a very long view of the business like we do and like infrastructure asset plays. They are a patient investor and do not have the need to invest large initial amounts of capital or invest quickly.
“We would all like to find sizeable, great returning tower investments, but sometimes being patient and not investing can be the best decision. With Redwood, we have a group that affords us the flexibility to do deals of almost any size at a time and price that we think is appropriate,” he added.
The industry has changed quite rapidly after 2008 with respect to the cost of capital and sources of capital available, according to Bizick, and Tarpon was looking to become more competitive in this regard with Tarpon II.
“Low cost of capital is a strategic advantage to a tower company,” Bizick said. “We hope to be even more competitive on larger transactions than we have been in the past. We are all very optimistic about where the industry is headed and what we can do with our new partner over the next 10 years.”
The company, which now has 20 assets and some 75 other sites in various stages of development or acquisition process, is in the process of rebooting and aims to add 50 to 100 assets each year through a combined build and buy strategy. Bizick and Freeman do not plan on changing the company’s grassroots style of cell tower development, finding value through pursuing mixed tenant assets with telephony, broadcasters and government tenants on the towers, and exploiting 26 years of relationships
“We will continue to strategically develop great assets in local markets where we have strong relationships,” he said. “We will compete for, and hopefully periodically win, build-to-suit contracts with the carriers. We will work locally with joint development partners that have grassroots knowledge of where assets need to be built for multiple carriers. And, we will buy towers on a “one off” or multiple tower basis whenever it makes sense. It’s the same formula that we and others have used for years. Our focus is on asset quality and not quantity per se. Being big for big’s sake is not of interest to us.”
Before starting Tarpon, Freeman and Bizick were executives at Global Signal, formerly Pinnacle, and before that Bizick was an executive with SBA Communications from its inception. Over 26 years, Bizick has seen some ups and downs in the tower industry but he said he has never seen it as good as it is now.
“After the financial stumble in 2008, the public companies got healthier faster than anyone expected. With cheaper debt and enormous capital spend by the carriers as two primary factors, we have seen multiples for tower deals rise to levels never seen before,” he said.
Bizick believes in the tower industry over the long term. “The FCC recently completed a spectrum auction and another is on the way. Historically this has always resulted in a corresponding investment in the infrastructure to support the deployment of the auctioned spectrum,” he said. “I think if you are patient and prudent with your capital, you can enjoy success in the industry for a long time. I think there is a lot of runway left.”