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During discussions on tower companies' full-year 2023 earnings, several key points emerged. The reduction in spending by carriers had a widespread impact across the telecom industry, leading to workforce cuts for many companies. This sheds light on the cautious investment approach of these companies in the current US market. Crown may be an exception due to the capital-intensive nature of its US fiber business, while American Tower and SBA have been less active in acquiring or building new sites in the US. Let's delve into these highlights and associated commentary.
American Tower Corporation
Displayed below is a chart illustrating American Tower's acquisitions and new site developments over the last three years. Since acquiring Insite Wireless, there has been minimal investment in the US tower business. American Tower notably allocated approximately $10B towards acquiring CoreSite (data center company) by the end of 2021, influencing their investment strategy over the last two years. While I believe CoreSite was a strategic acquisition, the lack of growth in the US tower sector is evident. It's apparent that American Tower's leadership prioritizes international investments for higher returns on capital. With the mature US market and record-high tower prices, this approach aligns logically. Despite my optimistic bias towards the US market, my experience with American Tower taught me they do their due diligence on where their capital is best spent.
Source: American Tower Corp SEC Filing 10-K Annual Report for the fiscal year ending Sunday, December 31, 2023
The chart below displays the revenue breakdown across different property segments, indicating the significance of the US market, which contributes nearly half of the total revenue despite recent international investments yielding higher returns. Anticipating a rebound in the US market, I previously mentioned the potential growth in their data center business, which I believe is still in its early stages. It's worth noting that once the sale of the India business is completed, these revenue percentages will be altered.
Source: American Tower Corp SEC Filing 10-K Annual Report for the fiscal year ending Sunday, December 31, 2023
SBA Communications
Over the course of their existence, SBA has prided itself on not entering into a Master Lease Agreement with any of the big carriers. However, that stance changed on August 1, 2023, when they finalized an MLA with AT&T to streamline their deployment of 5G and additional generation technology. This was a big step as their rivals have MLAs with all the major customers. Before this deal, AT&T was extremely aggressive working with tower developers to leave high rent SBA towers. As you can see from the domestic leasing revenue chart below, AT&T has declined at about 2% of SBA’s overall domestic revenue since 2021. That may not seem like much but it’s enough to keep leadership up at night which is why I believe an MLA was reached with them.
It'll be interesting to see how much churn hasn’t been captured in the percentage for T-Mobile. I’m sure there’s a lot of single tenant Sprint/Nextel sites that are churning this year and next which will normalize these percentages. It will help significantly reduce costs for T-Mobile which will increase their profitability.
Source: SBA Communications Corp SEC Filing 10-K Annual Report for the fiscal year ending Sunday, December 31, 2023
Finalizing an MLA with AT&T was crucial, as shown in the snapshot below. AT&T's site development revenue isn't substantial enough to be featured in the chart. These MLAs offer opportunities for cell tower companies to gain additional revenue. They may involve new leases with fixed rates and yearly site commitments. For instance, AT&T might commit to collocate on 100 sites annually for 5 years, with each site generating $1,500 per month in tenant rent and a 2.5% yearly escalation. While this may not seem lucrative initially, it ensures future growth, especially during market uncertainties like the present.
Source: SBA Communications Corp SEC Filing 10-K Annual Report for the fiscal year ending Sunday, December 31, 2023
Crown Castle
T-Mobile appears to contribute significantly to Crown Castle's US revenue, like SBA's situation. All three major tower companies are affected by the churn of Sprint/Nextel and any unnecessary overlap. In 2013, Crown Castle struck a deal with AT&T, acquiring rights to 9,100 towers. AT&T secured a leaseback rate of $1,900 per site with a 2% escalator, ensuring relatively low rent and escalation for numerous sites. Despite this deal, AT&T's revenue share may seem smaller due to the favorable terms, while Verizon likely commands a higher average monthly lease rate. A quarter of Crown's revenue comes from other sources, including a rapid deal with Dish Network, likely constituting a significant portion of that 25%. This early agreement garnered Crown more business from Dish than its competitors.
Source: Crown Castle Inc. SEC Filing 10-K Annual Report for the fiscal year ending Sunday, December 31, 2023
The lack of spending by carriers in the past 6-9 months has intensified pressure on cell tower companies. This, coupled with churn from Sprint/Nextel, complicates revenue generation for these companies. They have been cautious with their spending in recent years, with American Tower prioritizing international investments over expanding its US tower portfolio. SBA has shown interest in expanding internationally, while Crown faces internal challenges with its former founder seeking board seats to sell their fiber business. The big three tower companies seem to be conservative in their asset management and US acquisitions. However, as carrier spending increases, we can expect the tower companies to ramp up their investments, possibly leading to acquisitions of smaller tower companies by the big three.
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