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Tower Executives See Carrier-inspired Growth for Wireless Infrastructure

More Growth to Come as Sprint and T-Mobile USA Join the 4G Roll Out

By Don Bishop

Growth, both organic and through acquisitions, was the dominant topic as executives from the big three tower companies spoke at the Wireless Infrastructure Show on Tuesday in Orlando, Florida. Ben Moreland, president and CEO of Crown Castle International; Brendan Cavanagh, senior vice president and chief financial officer of SBA Communications; and Rod Smith, senior vice president and chief financial officer of American Tower’s U.S. tower division, spoke with PCIA President and CEO Jonathan Adelstein during “The View from the Top: An Executive Roundtable,” a plenary session.

“We’re up to our ears in integration,” Moreland said, speaking of Crown Castle’s acquisition of a portfolio of towers from AT&T. “We’re integrating 9,700 sites we acquired from AT&T at the end of last year.” He said with an acquisition of this size, it normally takes six to nine months before a tower company is able to accept applications for antenna space rental on the acquired sites at the same speed as other sites.

Smith spoke about American Tower’s acquisition of towers from Global Tower Partners, saying, “At this point we’re ahead in terms of capturing our selling, general and administrative expense synergies that we originally had in our investment case. That provides a tailwind for future margin expansion. We also posted strong growth in those assets in the first quarter of 2014. The core organic growth for the GTP assets was 9.9 percent for the first quarter. That outpaces the core organic growth for the quarter for the legacy American Tower sites, which was 9.2 percent.” He said both numbers are well ahead of the 6 to 8 percent core organic growth rate that American Tower targets for the long term.

Cavanagh addressed the issue of 4G network build outs and their effect on the tower business. “Although we’ve seen record growth during the past couple of years from our Big Four carrier customers in the United States, the backlog remains at a record level,” he said. “The growth trajectory for continued deployment is significant for the next few years. Many amendments have been for 4G upgrades, and it is still going on. And the carriers are engaging in a lot of coverage builds, too. We expect to see growth during the next few years comparable with what we’ve seen during the past few years.”

Moreland said Crown Castle expects a record application volume this year. “We’ve never seen it as busy as it is now,” he said. “A lot of amendments are carrying out 4G deployments, depending on which carrier. We’re seeing significant collocation activity return to the market.” Leading the way are Verizon and AT&T, he said, adding that he expects it to continue with Sprint and T-Mobile USA later on. He said the carriers and Wall Street recognize that the use of towers for network build outs represents an efficient use of capital.

Smith said that during the past several years, American Tower has invested $7 billion in U.S. infrastructure. He said the company also has assets in 12 countries in four continents. He said 64 percent of the company’s acquisition capital has been spent in the United States in the past several years. “We absolutely are bullish on the U.S. market,” he said.

Smith said Verizon has completed its initial roll out of LTE. “We describe its network as a mile wide and an inch deep,” he said. “They’re going to have to come back in and densify the network.” He said AT&T is moving rapidly through its initial LTE upgrade. Sprint and T-Mobile also are working on LTE upgrades. “It’s been a long time since we saw all four wireless carriers as active as they are,” he said. “We believe that will continue.”

The executives spoke about progress with loosening restrictions on wireless infrastructure. “There definitely seems to be a shift at the FCC to appreciating what wireless infrastructure does and to try to speed the process for deployment,” Moreland said. “Even so, you have things that fly in the face of that, whether it’s rules about public notices for towers’ effects on migratory birds that seem to be the opposite of the overall theme. But there’s a positive shift.”

Cavanagh said there has been a recognition of the value that wireless infrastructure brings to the consumer and the economy that is significant. Smith added that the U.S. government seems to recognize the value of bringing broadband services to people across the country.

Moreland tied innovation at the consumer wireless device level with growth for the wireless infrastructure business. He also noted spectrum owned by the First Responder Network Authority and Dish Network look like future opportunities for antenna space rental. “Over time, that spectrum will be deployed in some shape or form that will result in further sharing of our infrastructure,” he said.
Cavanagh said the clearer growth opportunity lies with the four large U.S. commercial wireless carriers. “It’s nice to know that there are other guys out there with additional swaths of spectrum that will ultimately be deployed,” he said. “Whether it’s in partnership with an existing carrier or independently, that will help to sustain the growth rate for years to come.”

In past years, the “View from the Top” roundtable has featured as many as five executives from large tower companies, but with consolidation reducing the number of large tower companies and concentrating tower holdings among Crown Castle, American Tower and SBA Communications, this year’s roundtable had fewer figures on the stage.

SBA Communications Ends 2013 on a High Note

With site leasing revenue growth of 12 of percent, tower cash flow growth of 16 percent and AFFO per share growth of 22 percent, SBA Communications had a strong fourth quarter and increased its expectations for 2014.

Jeffrey Stoops, president and CEO, said, “Our U.S. business was very busy, with our wireless customers continuing the strong pace of equipment installation that we have experienced all through the year. With continued expected strength in organic growth and material portfolio growth, we are able to increase key elements of our 2014 Outlook. We are expecting another strong year for SBA in 2014.”

Amendment activity contributed more than half of incremental leasing revenue in the fourth quarter. Additional collocation leases contributed more than 40 percent of new leasing revenue, compared with 15 percent in the fourth quarter of 2012. The tower company’s leasing backlog remains at record levels.

“Interestingly, [collocations as a percentage of new leasing revenue] is down from the prior quarter. However, and very importantly, the absolute number of leases was up from Q3,” Jennifer Fritzsche, Wells Fargo senior analyst, wrote. “The percentage was down given the high amount of amendment revenue SBAC also continues to see.” Amendments are being driven by the efforts of AT&T and Verizon to increase the density of their networks, as well as to deploy additional AWS spectrum, she added.

AT&T and Verizon represented well over half of SBA’s new business in the quarter. Sprint continues its Network Vision project and has just begun its 2.5 GHz build out, and T-Mobile continues its 4G upgrade, although not in the 700 MHz band on SBA towers.

“We had a very busy quarter with respect to new leasing business,” Stoops said. “And we signed up another high number of both new tenant leases and amendments. Our customers are requesting larger equipment loads, which has a favorable impact on rate.”

During the fourth quarter of 2013, SBA purchased 2,138 communication sites for $321.1 million and built 119 communication sites. As of December 31, 2013, SBA owned or operated 20,079 communication sites. Total cash capital expenditures were $403.9 million, including $398.2 million for new tower builds, tower augmentations and communication site acquisitions.

“With respect to portfolio growth, we had another strong year, exceeding the high end of our portfolio growth goal in 2013. We’re off to a very strong start in 2014, and we anticipate exceeding the high end of our annual goal by the end of the first quarter,” Stoops said. “We will continue to look for additional opportunities certainly in our existing markets and potentially some new markets, although our preference currently is to stay in the Western Hemisphere.”

Proposed Tower Financing Given Negative Outlook

Concerned about the tower companys sizable near-term debt and warrant obligations, Moody’s Investors Service gave its second-highest speculation grade (Ba2) to the $1 billion Incremental Term Loan that was proposed by SBA Communications (SBAC).

SBAC will use the proceeds to finance the acquisition of a second tower portfolio from Oi S.A. consisting of 2,007 wireless communications sites in Brazil for $635 million. Proceeds will also replenish its revolver credit arrangement, which it used to fund the acquisition of the first tower portfolio from Oi.

The negative rating outlook reflects the new risk that SBAC will face in restoring its financial profile to a less-risky status, according to Gregory Fraser, senior analyst, Moody’s Investors Service.

“Though SBAC has made good progress to de-lever following the debt-financed purchases of TowerCo in October 2012 ($1.45 billion in cash and stock) and Mobilitie in April 2012 ($1.1 billion in cash and stock) and is currently tracking better than our projections,” Fraser wrote. “The use of debt to fund the two Oi transactions will again increase adjusted leverage metrics outside the Ba3 rating range and delay de-leveraging.”

Moody’s is also concerned that SBAC may be exposed to refinancing risk given the sizable near-term debt and warrant obligations, which total almost $2 billion over the next 12 to 15 months.

“During this period, we believe SBAC will have ample opportunity to demonstrate the ability to control its capital structure and maintain the Ba3 rating,” Fraser wrote. “Absent continued EBITDA outperformance, we believe SBAC will be forced to issue equity to settle the Convertible Warrants in order to preserve the Ba3 rating.”

Because of the Oi portfolio purchases, Moody’s expects SBAC’s leverage to increase to about 9.2x total debt-to-EBITDA from about 8.5x as of Sept. 30, 2013.

Moody’s also affirmed SBAC’s Ba3 Corporate Family Rating, Ba3-PD Probability of Default Rating, existing debt instrument ratings and its SGL-1 Speculative Grade Liquidity Rating.

“The rating outlook could be stabilized if SBAC demonstrates EBITDA expansion and leverage in a range of 7.75x to 8.5x (Moody’s adjusted) as well as free cash flow relative to debt of at least 5 percent (Moody’s adjusted),” according to Moody’s Credit Rating Service. “While unlikely over the near-term, ratings may be considered for an upgrade if SBAC delivers the following Moody’s adjusted key credit metrics on a sustained basis: debt-to-EBITDA of 7x, (EBITDA-Capex) interest coverage approaching 2x and free cash flow-to-debt greater than 5 percent.”

SBAC should be in a position to de-lever under 8.5x by year-end 2015, due to EBITDA expansion from the incorporation of the Mobilitie, TowerCo and Oi tower sites into its operations, barring the addition of incremental debt in the capital structure, according to Moody’s.

Proposed Sprint/T-Mo Merger Top Story for 2014

Wireless carrier consolidation and the accompanied jitters it inspires will be one of the top stories again in 2014.

As we headed in to the holiday break, the Wall Street Journal reported on Dec. 13 that Sprint was considering a merger with T-Mobile US, which set the industry into full speculation mode.

If such a merger would occur, Jennifer M. Fritzsche, senior analyst, Wells Fargo wrote, it would have the biggest impact on Crown Castle International, which has an overlap between T-Mobile US and Sprint totaling 8,000 sites, which accounts for 20 percent of its U.S. portfolio and 10 percent of its consolidated site rental revenues, according to Fritzsche.  SBA Communications would be the least affected with an overlap of 2,000 sites or 13 percent of its domestic portfolio. American Tower has an overlap on 5,500 sites, which 20 percent of its domestic portfolio, but it accounts for less than 5 percent of its revenue.

Average remaining term of leases on affected sites at all of the big three tower companies is seven years.

“We would be affected very little by the combo of Sprint and T-Mobile US in terms of existing overlap, however it would affect our growth model and likely pricing on exit as I think initially the entire market would trade down,” said Ronald G. Bizick, II, CEO, Tarpon Towers.

The Nikkei Asian Review reported on Dec. 25 that Sprint’s owner, SoftBank, was in the final stages of talks with Deutsche Telekom to purchase the majority of shares in T-Mobile US for $19 billion. SoftBank has approached Credit Suisse, Mizuho Bank, Goldman Sachs and Deutsche Bank, looking for funding, according to Bloomberg News.

And then there are the antitrust and competition concerns of two major carriers merging. Not forgotten is AT&T’s $39 billion merger proposal for T-Mobile US in 2011 that was nixed by the Department of Justice. Worries caused by that deal stifled growth in cell site development for the better part of that year.

A Sprint/T-Mobile US merger would create a super carrier with 100 million subs, making it competitive with the current duopoly, AT&T and Verizon. The combo would also make Softbank the second largest carrier in the world behind China Mobile. Whether the deal goes through depends in part on whether it is seen by the FCC and DoJ as improving competition or harming it.

Another issue might be timing of the merger, according to Mobile Ecosystem analyst Mark Lowenstein. “[Softbank’s] Masayoshi Son’s already uphill battle [to merge with T-Mobile US] has become progressively steeper given T-Mobile’s 2013 trifecta of successful Metro integration/expansion, rapid LTE deployment, and success with its ‘un-carrier’ strategy,” he wrote. “AT&T’s planned acquisition of Leap will put further pressure on Sprint MVNOs. Plus, the incentive auctions have been delayed into 2015, pushing commercial reality of additional sub-2.5 GHz spectrum for Sprint even further out.”

To make matters even more complicated, Charlie Ergen, the driver of much of last year’s merger melodramas, has decided he may want to poke in his nose. Reuters reported on Dec. 18 that DISH Network was considering its own bid for T-Mobile US, pitting it against Sprint, the carrier it used to want to buy.

SBA Expands in Brazil, Acquiring Additional Sites

The Olympics are not the only thing going to Brazil. SBA Communications has purchased more than 2,000 wireless sites from Oi, one of Brazil’s largest telecom carriers, for $645 million. Previously, SBA acquired use rights to 2,113 sites from Oi, a deal that closed in November.

SBA President and CEO Jeffrey Stoops said he was impressed with the quality of the sites, which are concentrated in the most populous areas of Brazil and have demonstrated attractiveness to additional tenants.

“With this acquisition, we will have established SBA as one of the largest and most capable independent tower operators in Brazil, a market which we believe is very attractive and will produce strong growth in the future,” he said.

Under the long-term agreement, Oi will make monthly lease payments for antenna space on each of the sites, which average 1.6 tenants. SBA expects to fund the purchase price from cash on hand, existing revolver capacity and future debt issuances.

During the “View From the Top” session at PCIA’s Wireless Infrastructure Show in October, Stoops said SBA gauges international investments by risk adjusting them against the North American market and analyzing the company’s capital allocations.

“Shareholders like to see top line and EBITDA growth,” he said. “To make sure we always had the largest or the right size of playing field to deploy capital, we moved international investment first in Canada, then in Central America and, most recently, in Brazil.”

Whether a capital allocation is made in the U.S. versus international is based on which has the appropriate return on investment, according to Stoops.

“The return on international investment always is higher than what we would seek in the United States,” he said.

The end game for SBA, according to Stoops, is to always stay fully invested, so if investments in foreign or domestic towers aren’t attractive, it will purchase its own stock or pay down debt.

“It’s all about managing the equation to produce the greatest value for shareholders,” he said.

American Tower Also Bets on Brazil

SBA is not the only U.S. tower company heavily invested in Brazil. American Tower entered the market in 2000 and now has 7,500 towers covering 80 percent of the country’s GDP.

American’s portfolio is mostly urban and suburban in the large metros, such as Sao Paulo, Rio de Janeiro. Towers are also strategically located along major transportation corridors, and 70 percent of them are self-supporting structures, 20 percent are rooftops and 10 percent are monopoles/guyed structures.

The reason tower companies are interested in Brazil is simple. With an IT/telecom market size of $180 billion, Brazil stand as the fourth largest market in the world and it represents more than 50 percent of Latin America.