Towers: More Tailwinds Than Headwinds, and a Few Wrinkles

By J. Sharpe Smith, Senior Editor

June 16, 2020

Left: Peduto, Right top: Gellman, Right Bottom, Fritzsche

Jennifer Fritzsche, a senior analyst with Wells Fargo Securities who moderated a panel session, “Towers: Coping in a Time of Turmoil,” during last week’s AGL Virtual Summit, noted that although this is a tumultuous time, “the tower industry is experiencing more tailwinds than headwinds.” She asked her panelists, Alex Gellman, CEO of Vertical Bridge, and Tony Peduto, CEO of CTI Towers, about those tailwinds and headwinds.

Fritzsche: How have your companies held up during this time?

Peduto: The pandemic has shown that the carriers need more coverage. They have to obtain more capacity. There was steady lease up through the first quarter. Public stock prices have been good.

Gellman: We are lucky. We don’t have to worry about our business and our employees don’t have to worry about their jobs. It is a time of turmoil in the world, but not in our company.

Fritzsche: How would you characterize the state of the carriers?

Peduto: T-Mobile is stirring. They have done a lot of work on maximizing their network and integrating the Sprint sites. I would have thought we would have seen more of that done previously. They are working through that now. We are seeing activity from their site acquisition personnel and their regional people. T-Mobile is required to offer a certain number of towers to Dish Network, but Dish will not be putting up the same amount of equipment that T-Mobile had. Dish will renegotiate the prices down on the rad centers.

Gellman: T-Mobile has to accommodate the Sprint customers on its network before the Sprint network can be shut down. Around 20 percent of the Sprint customers’ handsets (CDMA) are not compatible with the T-Mobile network. I would expect that only Sprint sites will get rationalized, not T-Mobile. That is typical in a merger. Historically, the buyer keeps all its own towers. How long it will take to convert all the handsets depends on how much they have budgeted for those conversions. Then they have to work through the lease renewal dates.

This is the first merger after the deployment of LTE. Because of an agreement between the tower owners and the carriers that occurred when LTE was deployed, massive amounts of LTE sites all have the same lease end dates. Those lease end dates are coming up soon, and so T-Mobile will have to navigate through that.

Peduto: When all the leases end at the same time, that means the integrations all happen at the same time. That is a lot of coordination.

Gellman: With the purchase of Sprint, T-Mobile received scale and clear spectrum at 2.5 GHz. The easiest thing for a carrier to do is overlay new spectrum on existing sites. They will require amendments, which is good for towers. That is a high priority for T-Mobile. However, do not underestimate the complexity of the T-Mobile/Sprint merger. Many factors will make it difficult. In the end, it will be super positive for all of us, but don’t underestimate how hard their job is right now.

Fritzsche: What about Verizon – the steady tortoise of the group?

Gellman: Verizon is still run on a regional basis. It has the most powerful regional vice presidents among the carriers. They are steady. You used to be able to count on Verizon and AT&T to have a good budget every year and to stick to it. But anymore, what is different is they can change in the middle of the year. Right now, they are moving forward and they seem to be funded. In the short run, Verizon is concentrating on in-fill as the most cost-effective way to increase capacity. But that could stop before the end of the year. We just live quarter to quarter now.

Peduto: We have seen Verizon be pretty active in our rural areas [Iowa, Nebraska, Minnesota]. T-Mobile was deploying in rural areas last year before they got shut down by the government.

Gellman: Verizon does need more mid-band spectrum. I think they will address it. There is a lot more spectrum coming to the market. I expect them to be active in the CBRS and C-band spectrum auctions. There are three things that carriers can do to improve their capacity: one is to move from 4G to 5G, another is to add spectrum and another is to densify.

Peduto: The New T-Mobile is going to have a lot of free cash starting next year and beyond. How are they going to deploy that capital and what impact will it have on what AT&T and Verizon will do?

Fritzsche: Do you worry that AT&T and Verizon will slow their buildout when the C-band spectrum comes up? The bidding has been projected in the $30 billion to $60 billion range.

Gellman: I do worry. This is the last opportunity for the FCC to allocate spectrum to wireless before New T-Mobile gets cranking with scale, free cash flow and solely focused on wireless, which will force AT&T and Verizon over the long term to invest more in their wireless networks than they might otherwise. This might be their last chance to hit the pause button on building out.

Peduto: Everyone expects the New T-Mobile will come out flying. AT&T and Verizon are going to have to keep up with T-Mobile or risk customers dropping off.

Fritzsche: What do you think about Dave Mayo being hired away from T-Mobile to Dish Network?

Gellman: I think it is exactly what the doctor ordered. I think it is important that he reports directly to [Dish CEO and Chairman] Charlie Ergen. That’s the way it needs to be. Dave was given freedom from Neville Ray [president of technology at T-Mobile] to do his job. Dish should give him that type of freedom because he knows exactly what has to be done.

Dish has very specific deadlines and very specific promises of what they will provide down to the cell site count they need to deploy by 2023. Dave understands that extremely well. I can’t imagine a better hire for them. This helps them hit the accelerator. He is tough. He is not a pushover.

Peduto: Mayo was responsible for a lot of the T-Mobile build out. He is a deployment expert. He knows exactly what needs to be done. If they give him free rein, he will get it done. There won’t be any slowing down.

Fritzsche: What does the build-to-suit tower market look like?

Peduto: BTS is a regional market. Deals are getting done. Multiples keep going up. These companies are selling their towers for very good returns. We see money coming in from infrastructure funds.

Gellman: Each carrier has a different approach to BTS; some are regional and some are national. BTS serves the purpose of restocking the shelf for the M&A market. BTS is where the chickens come home to roost. You need to know how to build the tower and, ultimately, the carriers want delivery. That’s harder to do if you are purely a financial player.

Fritzsche: How does the M&A market this year compare to last?

Peduto: I don’t think it will be as robust as last year. With the COVID pandemic, everyone is trying to figure it out. It is difficult to get out and perform due diligence in the field, and yet deals are getting done. We are working on two transactions ourselves right now where we are buying additional assets. You have to dig for them to find them. We don’t play in the broker environment, because the multiples get too crazy.

Gellman: Better than 2018, not as good as 2019.

Fritzsche: How do the capital markets view towers? Are they comfortable with your business model?

Gellman: Incredibly so. The story of COVID for towers and data centers was the capital window shut down for one week and then bounced right back up. Stocks are now beating the market and are up significantly for the year. This is the continuation of the process of delineating towers from other types of real estate, like malls. No one is giving up their cell phone. They might not go to the mall.

Fritzsche: How do you view the future of wireless infrastructure?

Gellman: Towers are going to be hot for a while because of densification. And then in the front end of 5G, towers will benefit from amendments. Over time it will shift to small cells as the 5G uptake continues and as the geography where small cells economically make sense expands. That will not replace macros; it is just where the capital budget is going to go. On the data center side, hyperscale is super stable; it is a super business model and the closest to towers that I have ever seen. Next is distributed data centers like DataBank. That is where the Edge is located today. Mobile edge compute is still a very experimental, venture capital investment. It’s a wild card. When is it coming?