Tarpon Towers primarily builds towers and makes some tuck-in acquisitions here and there, according to company CEO Ron Bizick. “Our portfolio is currently north of 360 towers, with several hundred build-to-suits under agreement to complete over the next few years,” he said.
In Bizick’s view, the tower business remains largely driven by amendments, which are modifications to cell towers and cell tower equipment that bring increased payments from renters. He said that although there is a government mandate to cover more areas unserved by commercial and public safety wireless communications, along with an imperative for mobile network operators to expand their coverage, tower operators continue to see a tremendous amount of growth coming from amendments.
Regarding new towers, Bizick said Verizon Wireless is Tarpon’s largest build-to-suit customer. He said Verizon has made a concerted effort in many markets that Tarpon serves cover uncovered or poorly covered spaces. He said Verizon has always been the bellwether that other carriers tend to follow. “If you had Verizon as an anchor tenant and other carriers weren’t there, you typically would see at least one more tenant over time,” he said.
Compared with prior years, Verizon’s orders for towers have slowed, Bizick said. He attributed that to Verizon directing some of the money toward small cells and a fiber-optic cable initiative. “We have felt the impact of that capex spend in the wireless part, as it relates to Verizon, so the money is not really going disproportionately to wireless as it has in the past,” he said.
It is a great time to be a seller of towers, according to Bizick. He said the promise of 5G wireless communications has elevated the interest in the business of operating towers. Low interest rates, the money coming from infrastructure funds and direct investments that Bizick said the tower business has not seen before are squeezing out the telecommunications, media and technology (TMT) or private equity investors that traditionally have invested in towers. He said a platform company may achieve an even higher premium in a sale because the new entrants will need people to operate their acquisitions. A platform company typically is defined as the initial acquisition made by a private equity group.
“Multiples are at an all-time high,” Bizick said, referring to a method of establishing value for a tower, based on a multiple of its cash flow. “Not all assets are being valued the same. Disruptive new tower owners have given up amendment revenue rights. They have low escalators. Their spreads over ground are less than optimal. Those assets are not going to be valued at these high multiples. For the good, legacy assets that we have been building over time, it is a frothy environment. Companies that acquire towers make sure that it goes up and up and up.”
Carriers have caused the rise of more competitors in the tower business, along with an enormous amount of infrastructure investment money chasing towers, Bizick said. “The carriers have been looking for alternative partners for a number of years, and this is trickling down to small tower companies. We get pressure on our lease rates and on the terms of our build-to-suits. Couple that with the infrastructure fund money, and you end up with companies like Tillman — disruptive, for sure.”
Bizick said the economics of the deals made by the new entrants seem unnatural.
“When the music stops, will these guys find a chair?” he asked. “I’m skeptical. That’s a story whose ending remains to be written. I don’t know how that works out. You can say you have a really low cost of capital, that’s one thing. Building single-tenant towers in the middle of nowhere, overbuilding, I don’t think it’s’ a good practice. People seem to think they can make a meaningful business out of it. The smarter operators will be just fine. But I question how some of the newer entrants will do over time. The only thing that gets you out of a jam is lease-up, right? So if you can last long enough and capture some lease-up, you should be fine.”
In Bizick’s view, single-tenant towers built with generous terms for the renter will destroy investor returns and lead to carnage. He said the tower business is not as easy as it looks, and some of the new infrastructure investment funds and others entering the market need to know what they are doing. It is not enough that they believe their own opinions, he said.
Buying towers used for broadcasting comes with risk. Bizick said some broadcasters are simply looking for an efficient way to raise debt. He said tower operators must be cautious about broadcasters that ask for a below-market leaseback rate.
“In doing so, you are sustaining their business at some point in time, but that doesn’t mean it is going to last forever,” Bizick said. “When we see that and the onesie-twosie deals, we are careful to set that leaseback rate.”