NEW YORK-The current public capital crunch has slowed dramatically the buildout of some domestic wireless networks, but it hasn’t changed the positive prospects for the wireless tower industry.
“We think there have been about 1,600 towers (total) awarded (by carriers) under build-to-suit contracts in the last five quarters,” said Stephen Clark, chairman and chief executive officer of SpectraSite Communications Inc., Cary, N.C.
“There has been a slowdown and stretching out of (network) deployment plans, and there will be fewer sites built out in 1999 than anyone thought just two months ago.”
However, the regulatory push toward collocation of multiple tenants on individual towers and the expanding group of potential site users have created a favorable economic environment for tower companies, said Clark and other industry executives. They spoke at a recent conference, “Building Value in Communications and Media Towers,” co-sponsored by Kagan Seminars Inc., Carmel, Calif., and Lehman Brothers Inc., New York.
This positive climate means commercial and merchant bankers likely would be well-disposed to rush in where investment bankers today might fear to tread in offering financing for the expansion of tower companies, Clark said.
“The key to making towers pay for themselves is incremental revenues, which could be from many small users,” he said. “It’s not just a [personal communications services] and cellular world, although wireless is high-profile. There are a lot of other microwave systems, (like) pipelines and utilities.”
Of the 360 towers SBA Communications Corp. so far has constructed, Steve Bernstein, company president and chief executive officer, said 31 percent of the tenants are PCS; 22 percent specialized mobile radio; 18 percent paging; 13 percent cellular; 3 percent broadcast; 13 percent other, including Federal Express and the Federal Bureau of Investigation.
“Typically, broadband is the first anchor tenant. As we go more and more into a wireless world, there will be more and more applications that could be tenants on towers,” he said. “We’re not even that concerned about their credit because, even in bankruptcy, the last bill companies stop paying is the rent.”
Local multipoint distribution systems and wireless local loop networks also are potentially lucrative future customers for tower companies, said Dan Behuniak, president and chief executive officer of UniSite Inc., Tampa, Fla.
“All of us are trying to move up the learning curve and market to them, and the government is our quasi-partner, encouraging new revenues from the same tower,” he said.
At an average of $200,000 to build a communications tower, the monthly rent from a single broadband tenant creates a 44-percent cash-flow margin, said Sharon Armbrust, senior analyst for Kagan. With two broadband and one narrowband tenant, cash flow jumps to 71 percent. With three broadband and one narrowband tenant, cash flow margins exceed 80 percent, dramatically reducing construction payback periods, she said.
“Increased coverage and intensified usage will drive growth, but will cost and regulation lead to more collocation, and will that cause downward adjustments in (projections of) organic growth?” Armbrust questioned.
All tower builders are “being forced to collocate at least two or three users,” said Calvin Payne, chairman of Westower Corp., Vancouver, British Columbia, Canada.
In building towers to suit, siting decisions are the single most important issue for the collocation options and, therefore, cash flow production of tower construction companies, Bernstein said.
“Typically, zoning becomes a barrier to entry for other potential site owners,” Bernstein said.
Should demand for a particular site exceed the capacity of an SBA tower, Bernstein said the company “directs business to competitors with nearby towers because it isn’t cost-effective to compete.”
While tower company executives who spoke agreed their industry needs to exercise restraint by not building new towers near to those already constructed, wireless carriers may have a conflicting agenda, according to Clark of SpectraSite.
“Carriers are thinking about bringing site acquisition back in house because they want control over decisions like whether to build a new tower near … an existing one,” he said.
“In the near term, third-party site acquisition will be turned inward toward carriers, but site acquisition doesn’t need to be part of build-to-suit contracts.”
Cost considerations would seem to mitigate against that tendency, according to Westower’s Payne.
“What we can do for 25 cents, a telco can do for $1,” he said.
Westower, he added, is branching out beyond tower construction, functioning, in some instances very much like a carrier itself.
“We’re starting to own and operate complete microwave systems and carry traffic on them, although I don’t think this will happen with PCS anytime soon,” Payne said.
Collocation and cost-efficiency considerations have been key causes of “how the build-to-suit odyssey came into play in the last year to 18 months,” UniSite’s Behuniak said.
“These towers are part of wireless companies’ networks … but PCS, paging and cellular carriers are starting to realize they’re facing a whole new set of issues with collocation. Who gets the first right of access for disaster recovery after the tornado hits? There is the degradation of the signal over time and the question of how to tune the tower after more and more carriers are on it.”
Besides building new structures, tower companies actively are acquiring existing sites, particularly those owned by small businesses and located on the fringes of densely populated areas.
SBA’s Bernstein likened build-to-suit tower contracts to home runs. He compared to two-run hits the purchase of towers run by mom-and-pop operations whose owners won’t or can’t raise public capital to finance expansion.
“We (also) look at mom-and-pop companies. Many have built as cheaply as they could and overloaded their sites with antennas,” said Clark of SpectraSite. “But some have built up such good revenue streams that it would be worth the replacement cost to upgrade the antenna.”
Totally out of the ballpark for now is a third option: the purchase of towers from telecommunications services providers.
“At the right price, we would do a carrier deal. The reason these don’t make sense is that most are being `investment banked’, so they are shopped around to everyone,” Bernstein said.
Clark put it this way: “Carrier prices for site acquisitions are out of line, but the markets will force them back in line.”
