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Small Cells? Yes Please

September 27, 2016 — 

For three companies with roots in the tower business, small cells offer an alternative too good to pass up. Their fiber-optic networks offer small cell collocation opportunities that resemble antenna collocation opportunities on towers.

By Don Bishop

Executive Editor
AGL Magazine

rp_don-85x135-189x300-189x300-1-189x300.jpgEDITORS’ NOTE — This is the third of three articles revealing the different approaches to small cells of the major tower companies. Crown Castle International, InSite Wireless Group and Digital Bridge Holdings share an appetite for small cells.

For Crown Castle, small cells represent assets placed on a collocatable asset, which is the fiber-optic network that delivers traffic from a mobile wireless network at a local point. “Whether that’s a distributed antenna system (DAS) node, a small cell, a femtocell or a picocell doesn’t necessarily matter to us, as long as there’s a fiber on which we can collocate,” said Dan Schlager, senior vice president of corporate finance at Crown Castle.

Schlager said Crown Castle wants to make the fiber-optic network profitable. To do so, the company seeks to participate in the densification of the radio-frequency (RF) spectrum the mobile networks deploy and, in doing so, become a partner to its wireless carrier customers. “We firmly believe that fiber is the asset that we’re going to collocate on, and what we really try to push on,” he said.

In a view expressed by Jay A. Brown, Crown Castle’s president and CEO, because small cells are deployed closer to the end user and in a denser array, such as on traffic lights or telephone poles, they represent the natural progression of network densification required to provide continuous consistent high-capacity and low-latency connectivity. With small cells, the company’s initial investment relates primarily to the build out of the fiber-optic cable network. “We believe our fiber footprint of 17,000 miles in top mature markets combined with the capabilities that we have acquired and developed over time give us time to market and economic advantages that should allow us to capture a significant share of this large opportunity,” Brown said.

For 2016, Crown Castle is expecting $170 million in organic revenue growth, with $115 million from towers and $55 million from small cells. Brown said the company sees its investment in small cells as representing an opportunity to grow the dividend it pays shareholders.

“Looking beyond 2016, we believe we are in a multiple-year cycle of network upgrades and enhancements, as carriers focused on meeting significantly increasing demand for wireless connectivity, which we believe will benefit both our tower and small cell businesses,” Brown said.

InSite Wireless started in the DAS business 16 years ago. The company built a system in the Moscone Center in San Francisco that has since undergone nearly six generations of upgrades for densification. InSite Wireless focuses on indoor DAS, always providing fiber access to the sites.

“The leasing on DAS is phenomenal,” said Lance Cawley, CFO of InSite Wireless. He said the company built a DAS that covers the Massachusetts Bay Transportation Authority (MBTA) subway in Boston that serves AT&T Mobility, Verizon Wireless, T-Mobile USA and Sprint. In addition, Comcast provides Wi-Fi service. InSite Wireless has started some underground wireless service for Verizon in the Los Angeles County Metropolitan Transportation Authority (Metro).

“DAS is a wonderful, yet difficult, business,” Cawley said. “Unlike towers, which are just a simple real estate leasing business involving many forms and a documented information flow handled by run of the mill staff, in DAS, it requires somebody at all levels of legal, engineering, RF and finance. These are $20 million, $30 million and $40 million build outs that take many years to complete. It involves a lobbyist and attorneys. It’s complicated, but we have phenomenal results in our DAS business. I think of the small cell business as an extension of the DAS business. A small cell has a base transceiver station (BTS) built in, whereas DAS has a centralized BTS pack.”

Cawley said InSite Wireless is indifferent to which solution it provides. “We provide whatever is cost-effective for the carrier to meet its capacity demands,” he said. “We love the macro tower business. It’s the majority of our business. We believe you should be in all these lines of business to meet the carriers’ growth and capacity requirements.”

At Digital Bridge Holdings, CEO Marc Ganzi said mature small cell networks experience lease amendment activity much like the tower business does. And business is good. “In the small cell business, we’re drinking through a fire hose,” Ganzi said. “We have 2,000 nodes in construction. We’ve got a leasing backlog that’s worth close to $60 million in annual recurring rent. There’s more than we know what to do with. It’s that size of an opportunity. That’s good, because as some of the macro tower business has slowed, we’ve seen the small cell business accelerate dramatically.”

Dan Schlager, Lance Cawley and Marc Ganzi spoke at the Wireless Investors Conference, part of the Wireless Infrastructure Show, in May. The next Wireless Infrastructure Show is scheduled for May 22–25, 2017, in Orlando, Florida. Jay A. Brown spoke during an earnings call in July.

Well-capitalized Tower Companies Look to Strong New Year

If you use the flow of capital as a barometer, 2014 will be another good year for small cell tower companies.  Reporting a backlog of tower work, these firms are hungry for cash to build more towers. Small tower companies are also capitalizing so they can aggregate more towers.

In December, Bankers South provided $10 Million of debt capital to Bay Communications II, which develops, constructs and operates cell phone towers in the northeastern United States.  Bay Communications II is also backed by equity partner Seaport Capital, which initially invested in the company in 2011.

“Closing a debt facility with Bankers South will help allow the company to execute on its strategic and tower development objectives. Jim Riley, CEO of Bay Communications, said. “The company has a significant pipeline of tower development opportunities and I am pleased that we identified a financing partner who is going to help it achieve its goals.”

In November, Central States Tower II (CSII) received $35 million in financing from CIT Corporate Finance, a provider of financing to small and medium sized businesses. The senior secured credit facility will be used to refinance existing debt and provide additional capital for the construction and development of towers nationwide.

To qualify for a loan in the range of $35 million to $50 million, it typically takes the cash flow generated by around 150 to 200 towers, according to Brian Meier, CST II COO.

Horvath Towers received a senior debt commitment of up to $20 million from The PrivateBank in November. In October, Peppertree Capital Management provided Horvath with an additional $30 million in equity, raising its total equity commitment to $68 million. Together with Horvath’s equity commitment from Peppertree Capital Management, Horvath now has $88 million of available capital to develop towers

Skyway Towers received an additional $75 million equity commitment from its investors, Tinicum and Permit Capital Private Equity Fund, in February of last year.  Proceeds will be used to continue Skyway’s development of cell towers on a build-to-suit basis, according to Skyway’s chief development officer Eric Bondurant.

In August, InSite Wireless Group completed the sale of $177.5 million secured cellular site 2013-1 Rev Notes, which were backed by mortgages representing 72.7 percent of annualized run rate net cash flow. InSite owns or leases 512 cellular sites and owns the rights to operate 16 DAS networks.

Small Tower Companies Look to Grow Through Aggregation

CTI Towers secured up to $30 million in debt financing in October. But the firm, which was begun by Comcast, plans to use that money to aggregate towers, as opposed to building them. It was launched in 2011 with a management contract for 800 towers that were previously owned and operated by Comcast Cable subsidiaries. To date, CTI has acquired 230 of the 800 towers that it manages. Its long range goal is to be the fourth largest tower company.

Similar to CTI Towers, CiG is a tower aggregator.  In August, CiG completed a $35 million preferred stock financing agreement with Fir Tree Partners, a New York-based private investment fund. Up to $25 million in additional investment from Fir Tree may be used for additional tower acquisitions. In September 2012, the towerco closed a credit facility with Macquarie Bank for up to $150 million.