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RBC Remains Bullish on Public Tower Companies

August 30, 2016 — RBC Capital Markets remained overweight on the public tower companies, including American Tower and SBA Communications, with a “slightly greater weighting” toward Crown Castle International in the firm’s Mobile Infrastructure Recap for the second quarter.

“Towers are our only coverage sector with identifiable catalysts for (modest) revenue acceleration driven by various network activities at AT&T and T-Mobile, though slowing activity at Verizon could mute this trend somewhat,” wrote Jonathan Atkin, RBC analyst.

RBC’s preference for CCI is driven in part by the towerco’s involvement in U.S. outdoor small-cells and prospects for increasing tenancies from AT&T and T-Mobile.  The firm also believes CCI’s dividend will increase the shareholder base.

Additionally, S&P, Dow Jones and the MSCI U.S. REIT Index have made rules changes concerning REITs, which will have a favorable impact both American Tower and CCI.

“We believe the REIT GICS creation later this week will act as a structural catalyst favoring the tower REITs,” Adelstein wrote. “AMT and CCI, each of which are top-five REITs by market capitalization, have up to now not been included in the two most heavily benchmarked REIT indices (FTSE/NAREIT and RMZ), yet will be included in the new REIT GICS category, which we believe could drive index-related buying.”

Site Leasing and Organic Growth

RBC predicted a small increase in tower leasing in 2016 compared with 2015. While macro-site deployment will be down, activity will increase in macro-overlays, small cells and carrier aggregation.

“Verizon and T-Mobile should remain active, with each contributing slightly fewer macro-site additions vs. 2014, offset by greater macro-overlay activity and increased small cell efforts,” Atkins wrote. “AT&T should remain inactive on macro-site deployments but noticeably more active on site overlays. Sprint remains mostly dormant on macro site additions, focusing on carrier aggregation and BTS small-cell deployments.”

RBC predicted increased overall activity at T-Mobile in 2017 and possibly AT&T, with Verizon posting less macro-site and more small-cell activity.

Crown Castle: Leasing is ‘Healthy’

By J. Sharpe Smith

July 26, 2016 — Crown Castle International reported a strong second quarter, which reflected an “overall healthy leasing environment.” Site rental revenue grew 9 percent year over year to $805 million, with organic revenue growth of 7 percent. Those numbers included 6.2 percent from new leasing growth and 3.3 percent from escalators, minus 2.5 percent in churn.

“We’ve been able to grow through both organically and acquisitions, including integrating those acquisitions effectively,” said Jay Brown, president and CEO. “This solid execution has resulted in very good financial performance.”

The tower company met or exceeded the midpoint of its Q2 outlook in site rental gross margin, adjusted EBITDA, AFFO and AFFO per share. As a result, it increased its midpoints for the year.

CapEx Spend Favors Small Cells Over Towers

Brown said the current business environment for building towers is radically different from the turn of the 21st century, when Crown Castle built 1,000 to 2,000 towers annually.

“Today, we build less than 50 towers on an annual basis. And the reason for that is because we just don’t see the incremental returns as high enough,” he said.

Capex for small cells exceeded towers during the quarter. Year over year, small cell capex grew to $85.4 million from $53 million. Tower capex shrank to $75.9 million from $110.5 million. Investment in small cells represents a significant long-term growth opportunity, according to Brown.

“From a capital allocation standpoint, we are particularly excited about the small cell opportunities that we see ahead of us,” Brown said. “We’re choosing today to invest in and build immature assets because we believe there will be an environment over time that will fill those assets up and increase the yield.”

SBA Communications in Q1 Steady as She Goes

By J. Sharpe Smith

SBA CommunicationsMay 5, 2016 — Enjoying a solid start to 2016, SBA Communications reported that carrier activity was consistent with the last three quarters of 2015, featuring mostly amendments to existing macro sites, according to the towerco’s first quarter earnings call. Aside from normal churn and an iDEN de-commissioning hangover, which will last most of 2016, SBA achieved organic leasing revenue growth of 8.1 percent in the first quarter.

“By application and executed contract volume, the activity is substantially amendments,” said Jeffrey Stoops, president and CEO. “We expect the investments in macro sites by our U.S. customers will remain heavily weighted towards amendments for the remainder of this year.”
SBA projected increased growth in the long term (by 2020) through new sites and amendment activity, but conservative short-term estimates led Wells Fargo Securities to maintain its Market Perform rating for its stock.

“While this is a positive, SBAC continued to speak to a more muted domestic spending environment, which does not seem to be changing near term,” wrote Senior Analyst Jennifer Fritzsche.

During the quarter, carrier activity centered on the AWS-1 (Advanced Wireless Services at 1.7 GHz and 2.1 GHz) and 700 MHz deployments, as well as refarming of 2G and 3G spectrum to LTE,

“We are in the very early innings of AWS-3 (1.6 GHz, 1.75 GHz, 2.15 GHz), WCS (Wireless Communications Service at 2.3 GHz) and 2.5 GHz spectrum deployments all of which remain opportunities ahead of us,” Stoops said. “The amount of activity around an investment in our customers’ existing macro sites continues to be robust and underscores the importance of macro sites in our customers’ network plans.”

SBA lowered its services guidance to reflect reduced work from Sprint, while other carriers are expected to remain steady, compared with last year.

American Tower

Carrier activity reported by American Tower in the first quarter took place in the AWS-3, WCS, and 2.5 GHz bands, as well as through refarming 2G and 3G spectrum into 4G in the 800 MHz and PCS bands. Refarming drove amendments as old antennas were swapped out for more advanced antennas, according to James Taiclet, American president and CEO.

“This shift drives further investment into cell sites through technologies such as carrier aggregation as well as adding new cell sites to reduce the transmission radius and, therefore, the quality improvement for each signal,” he said. “This increase in cell site density is expected to drive incremental collocation opportunities on macro towers, as customers like us demand higher and higher peak speeds to enhance our user experience.”

Organic growth of U.S. property revenue is projected to be 5.5 percent by American Tower, compared with 12 percent for international properties.

Crown Castle International

Crown Castle saw organic site rental revenue grow 7 percent plus 3 percent cash escalations minus 2 percent from churn in the first quarter.

Jay Brown, Crown Castle CFO, also said carrier activity won’t increase in 2016. Additionally, the execution of new leases and amendments will be backloaded, 40 percent in the first half and 60 percent in the second half.

“Our view is that leasing activity in the full year of 2016 is going to be very similar to what we saw in 2015. And we continue to hold that view,” he said.

While Towers Carry the Day, CCI Invests in Future of Small Cells

By J. Sharpe Smith

April 26, 2016 — Crown Castle International exceeded its expectations in the first quarter 2016 and raised its outlook for the full year as organic site rental revenue grew $55 million or 8 percent year over year. The first quarter saw 7 percent growth from new leasing activity plus 3 percent from escalations, minus 2 percent tenant non-renewals, the company said during it quarterly earnings call.

While the tower business is good for CCI, the majority of its current capex is devoted to its small cell business, which comprises 16,500 miles of fiber. While small cells account for $385 million, or 12 percent, of annualized site rental revenues, it is obvious CCI sees a bright future in them.

“We are as excited as we have ever been by the opportunities in small cells,” Jay Brown, CCI CFO, said. “Our small cell conversations with the carriers have increasingly become more positive with the passage of time and we are seeing the business model of small cells play out very similarly to that of towers.”

Brown walked through two case studies that illustrated the collocation economics of small cells as the fiber infrastructure. The first one was located in Denver, which originally comprised 14 miles of fiber connecting 18 tenant nodes on 18 poles for the first carrier. Since then two carriers have been added to the system, which now numbers 17 miles of fiber connecting 65 tenant nodes on 26 poles in the public right-of-way.

“In aggregate, this system currently generates a yield of approximately 20 percent, based on the recurring cash flows and the capital we invested in the system. As you can see with this system, we have been able to leverage the initial investment by collocating additional tenant nodes on the fiber to drive our returns,” Brown said.

The system CCI has in Las Vegas consists of 36 miles of fiber supporting 77 tenant nodes on 77 poles. The yield of 13 percent is less than Denver, because it hosts only two carriers. A third one, however, is on the way.

“We are currently working with a third carrier to collocate nodes on this fiber network and anticipate adding that third carrier to this system in the next six months,” Brown said.

One of the questions surrounding small cells has concerned the number of carriers that would want small cell coverage in the same location. Unlike the Denver example, where the majority of the colocation of tenant nodes occurred on the same pole as the first carrier, the collocations in Las Vegas occurred at different pole locations along the existing fiber.

“Because the majority of the investment relates to deploying fiber, our yields increased by collocating additional nodes on our fiber, regardless of whether the colocation occurs on the same pole or on another pole along the fiber,” Brown said. “This is why we often describe the fiber as a tower laid on its side upon which we are aiming to collocate tenant nodes.”

Small cell deployment has driven improved yields on the fiber-optic systems, and CCI expects that trend to continue.

“Given the returns we are seeing from small cells, we believe our continued investments are consistent with our strategy of allocating capital to drive long-term growth in dividends per share,” Brown said.

Crown Castle Goes Back to the Future with Tower Development Corp. Buy

By J. Sharpe Smith

AGL-ArticleImg1April 11, 2016 – Some tower portfolios simply go to the highest bidder, others seem to the be the result of long term relationships in the industry. Crown Castle International’s purchase of Tower Development Corporation (TDC) late last week for $461 million could be placed in the latter category. TDC, which owns and operates 336 towers in the United States and Puerto Rico, is the portfolio company of Berkshire Partners, which has a long history of working closely with CCI.

The purchase of the towers, which average two tenants each, is expected to contribute $25 million to $27 million to CCI’s site rental gross margin in the first full year and to be immediately accretive.

The acquisition of TDC brings the giant public tower company full circle with the roots of its long-term relationship with Berkshire Partners, which was one of the original investors in Crown Castle. Along with investing multiple times in CCI, Berkshire worked with its management to build the financial tools needed to participate in the tower industry consolidation, eventually helping it go public in 1998 and with subsequent sales of equity securities.

Additionally, TDC, which was formed in 2009, has developed wireless infrastructure in partnership with CCI.

Berkshire also played a role supplying capital and advice in CCI’s acquisition of the British Broadcasting Corporation’s tower and broadcast assets in 1997, which were divested in 2004.

“There was a true partnership between [Berkshire] management and investors through the key early domestic acquisitions made by CCI, and especially during the ground breaking effort to prove to the BBC that CCI was a worthy outsourcing partner with the operating skills and capital necessary to ensure continued smooth operation of their critical transmission assets,” the firm writes on its website.

At the end of 2015, CCI had operations in 100 U.S. markets, with more than 40,000 towers, 17,000 small cells and 16,000 miles of fiber-optic backhaul.