The U.S. tower market is the place to be for growth, Ben Moreland, CEO, Crown Castle International, emphasized in the company’s third quarter earnings call, which was called in the wake of its AT&T Tower purchase.
“With networks already supply-constrained in the face of broadband data growth estimates of 6x to 8x over the next four years, it’s very clear to us that the U.S. market is one where we will see significant growth in the years to come,” he said. “We believe that the U.S. market represents the most compelling risk-adjusted returns for capital investment in wireless infrastructure.” Only 4 percent of Crown’s total sites will be located outside of the United States.
As a matter of course, Crown Castle chose to invest $4.85 billion to acquire 9,700 sites from AT&T, which will bring its U.S. tower count up to 40,000. As well as underpinning its commitment to the U. S. market, the purchase feeds Crown Castle’s urban presence, with half of AT&T towers residing in the top 50 markets. After the sale, 71 percent of Crown Castle’s towers will be in the top 100 markets.
“These AT&T towers represent a unique opportunity to acquire a large, urban-centric portfolio and further our strategy,” Moreland said.
With the completion of the initial phase of LTE deployment, macro site collocation is now driving in the market, Moreland said. AT&T’s towers have an average of 1.7 tenants, which Crown Castle will try to increase by at least one tenant per tower.
“These towers are well positioned to accommodate the demand we’re seeing in the carriers’ network densification,” he said.
Jennifer Fritzsche, Wells Fargo senior analyst wrote in an equity research note that she senses a “major shift in focus toward densification.” One sign of that swing is the drop in amendments as a percent of leasing activity from 70 percent to 20 percent in the third quarter, year over year at Crown Castle.
“Consistent with our recent channel check findings, Crown Castle indicated it saw much new business from new cell sites as carriers (namely AT&T and Verizon Wireless) continue to densify their respective LTE footprints,” Fritzsche wrote.
Crown Castle has six tower acquisitions from domestic carriers and historically they have performed well. Tower purchases from Bell Atlantic/GTE Wireless, Powertel and Bell South have produced yields of 15 percent, 16 percent and 18 percent, respectively – well above their 4 to 5 percent initial yields. Moreland said he prefers carrier portfolios because of the consistent quality of the locations.
“We believe, like the value we have created from the five other carrier tower transactions we’ve done, we will continue to drive shareholder value through our operation of these [AT&T] towers,” he said.
Crown to Sublease Tower Space to AT&T
AT&T committed to an initial lease term of 10 years across all sites with multiple renewal options and monthly rent of $1,900 per site with an annual escalator of 2 percent. Subject to certain limitations, AT&T’s rent includes rights to limited pre-defined space on the transaction sites, similar to certain existing customer agreements.
Crown acquired the exclusive right to lease and operate the AT&T tower portfolio sites for an average term of 28 years with expirations ranging from 2032 to 2048. At the end of the term, Crown has options to purchase the sites outright for a total of $4.2 billion