By Don Bishop
Clayton Funk, a managing director of Media Venture Partners, led the Wireless Investors Conference as part of the Wireless Infrastructure Show in Orlando, Florida, on Tuesday. His panelists were Brendan Cavanagh, CFO, SBA Communications; Rod Smith, CFO, American Tower’s U.S. division; Jay Brown, CFO, Crown Castle International; Ron Bizick, cofounder and CEO of Tarpon Towers; Ric Prentiss, managing director, Raymond James & Associates; and Kevin Brynestead, a managing director at Alpina Capital.
“The capital markets today are in tremendous shape with respect to the tower companies and the availability of very attractive capital,” Cavanagh said. “I don’t know if it changes anything because we’ve been fortunate to have access to low-cost capital for many years, but it serves to perpetuate our taking that available capital and investing it in furthering the growth of our business through portfolio investments.”
Cavanagh said SBA is the most levered of the three public tower companies, largely by design. “We target a leverage range of seven to seven and a half turns of net debt to EBITDA,” he said. “We’ve been able to maintain that because of the predictability of the business, the stability and the natural delivering that occurs in this industry. We’ve been able to continue to incur additional debt, raise it at attractive rates and turn around and invest it in high-quality assets both in the United States and internationally.”
Smith said the availability of low-cost capital hasn’t affected the way American Tower looks at its capital structure or balance sheet. “We’re investment-grade credit; that’s important to us,” he said. “We set our target leverage rate at three to five times EBITDA. We stretched ourselves up to 5.8 times due to the Global Tower Partners acquisition that we closed in the fourth quarter of 2013. We’re in the process of delivering back down to below five times. Maintaining investment-grade credit gives us access to transactions and access to capital when and if we need it.”
Brown said if the three public tower companies were compared with a typical real estate investment trust that would have a single-A credit rating would have a 35 to 40 percent enterprise value in the form of debt, although there is some difference among the companies for their amount of debt, all of them are conservatively levered compared with REITs. “Not only historically have we had great access to capital and that capital has been priced at low rates, the way we think about our balance sheets at all three of the companies would suggest as we’re viewed more as a real estate business and welcomed in that arena, there may be benefits in terms of rates and ratings as the businesses are evaluated by the ratings agencies more akin to what typical real estate businesses are,” he said.
Bizick said for small tower operators, obtaining equity and debt is relatively easy now. “As much money as you could possibly want, there’s plenty of capital in the space,” he said. “The challenge is that the little guy sometimes needs what I call walking-around money. If you don’t have something to bring to the table, typically the equity provider doesn’t want to fund a lot of selling, general and administrative expense, so that becomes challenging for the smaller guy to get started.”
Bizick said that on the debt side, without cash flow, it is difficult to get a facility placed that works economically or financially. “Typically, you need some cash flow to obtain debt without signing up for some ridiculous personal guarantee,” he said. “For some smaller developers, this is their lifeblood. They may have taken second mortgage on their house to build a few towers. So the financing is important to them.”
Turning to another side of the business, Prentiss said that with deals that have been announced, approved and closed, T-Mobile USA and MetroPCS closed their deal a year ago and it didn’t seem to have much effect on the leasing of antenna space on towers. He said AT&T and Leap Wireless closed recently, but there hasn’t seemed to be much discussion about resulting churn. “Sprint and Nextel closed a decade ago, and we’re just now starting to see some churn from that acquisition creep its way into the process,” Prentiss said. “If a Sprint and T-Mobile merger were to be announced, accepted and approved, the average term of contracts with them is seven to eight years. Even if there is an acquisition, it takes quite a lot of time to flow through the financials.”
As for consolidation among smaller carriers in rural markets, Brynestad said the problem is that the carriers are not generating much cash flow. “They have great spectrum positions, but the question is what do the big guys acquire the smaller guys for?” he asked. “Definitely not the consumer because the customers there are difficult to move over to a different network. The equipment is difficult to repurpose. And even though everyone is moving toward LTE, everybody’s system is difficult. The deals really are for spectrum positions.”