Business is booming for cell tower lease operators, thanks to the busy lifestyles that prompt Americans to rely more heavily on wireless communication devices, advanced technology that could take advantage of the industry's existing infrastructure and high barriers to entry that create a virtually protected market. Capital market experts expect to see steady growth in the securitization of cell tower lease payments, which parallels gains in the wireless telecommunications business.
Slow and steady growth, in this case, does not translate to stodginess or tedium. Cell tower ABS issuers have included a couple of unique features in recent deals. In early to midspring, two substantial transactions, the $1.7 billion American Tower Trust and the $480.2 million Global Tower deal, came to market, and both transactions included notable features.
The American Tower Trust transaction is believed to be the first to be structured out to seven years. Normally, cell tower lease ABS structures have five-year interest-only periods, which could be shortened if certain performance triggers are breached, said Michael McDermitt, a vice president and senior analyst at Moody's Investors Service. Three factors, however, granted American Tower the ability to go out to seven years. It has a corporate rating of 'Ba1,' the highest among the leading wireless tower operators, it has performance triggers that include cash traps and there is a generally positive outlook for the wireless telephone industry, which should sustain healthy demand for cell tower capacity, according to Moody's.
The Global Tower transaction used its proceeds to retire an acquisition line of credit from its acquisition by Blackstone Group in 2005. Global Tower Partners, the sponsor of the 144A deal, was bought out last month
by Macquarie Communications Infrastructure Group for $1.4 billion. Although it was not clear whether securitization would be used to finance the Macquarie deal, the transaction underscores the fact that the industry is growing rapidly and that certain companies are attractive targets for consolidation.
Morgan Stanley, which dominates underwriting mandates for the sector, led both securitizations. Market sources expect the sector to post strong, consistent growth down the line because of attractive financing and growth from the wireless telecommunications industry, the cell tower operators' main tenants.
"The industry has now accepted the benefits of securitization," said Sanjeev Khanna, a managing director of corporate structured finance at Morgan Stanley. "It is viewed as an integral part of their capital structure, and [cell tower companies] will continue to use it as another financing tool."
That is probably because the cost of financing for securitization is far better than that of high-yield debt, said Clayton Moran, a media and communications analyst for Houston-based Stanford Group Co.
"The lender views the towers as real estate and therefore will provide more attractive terms than your typical high-yield debt lender," Moran said. "They have been able to lower the cost of debt pretty materially by using securitization - probably by a couple of hundred basis points."
Bank lenders have become comfortable with the cash flows that the cell tower operators are generating, Khanna said.
"All of these businesses are growing dramatically," he said.
By year-end 2006, the cell phone industry counted some 233 million subscribers, according to the Washington, D.C.-based Cellular Telephony Industry Association. That translated to about 79% of Americans with cell phone service, what the industry calls a penetration rate, Moran said.
"Subscribers increased 12% in 2006 and should rise another 9% this year and reach 93% penetration by 2010," Moran wrote in a recent wireless and cell tower industry outlook report. The use of wireless minutes is up drastically and increased by about 20% last year. That percentage represents the lowest growth rate that the sector has had over the past several years. Further, 2006 represented the first year that the use of wireless minutes surpassed the use of wire lines, or landlines. Dallas-based regional carrier MetroPCS, for instance, offers unlimited calling plans as a wire-line replacement product, further driving wireless usage.
"We estimate the wireless industry generated roughly 2.1 trillion minutes during 2006, representing 20% growth and accounting for roughly 805 minutes of use per subscriber per month," Moran wrote. "Additionally, we project total wireless minutes to grow at a 9% CAGR between 2006 and 2010, owing to sustained subscriber growth and continued migration of telecom minutes to wireless."
While acknowledging that the number is solid, other industrialized countries boast penetration rates of 100%, and in some cases more, because subscribers have more service options and often carry more than one device, said market sources.
Whether they are national or regional, wireless service carriers are expanding. Currently, they are looking at ways to harness and distribute what the industry calls WiMax technology, which is aimed at providing wireless data over long distances. WiMax can be applied in several ways, from machine-to-machine communications to wireless Internet services through laptops and cellphones.
Overall, more than 56% of industry capital spending should occur in the second half of 2007, Moran said. Wireless capital spending should increase by 3.8% during 2008, to $27 billion, a result of increased investment in 3G and 4G networks, as well as an initial build-out of spectrum purchased in Auction
66, the Federal Communications Commission's largest auction of wireless spectrum. The FCC is also expected to auction 700 MHz of spectrum by the end of next January. That should provide ample demand for capital spending over the next several years, Moran said.
That requires more antennae, as wireless service providers get Americans to use more minutes. The major cellphone service providers, such as Verizon Communications and AT&T, are leasing infrastructure owned by tower leasing companies to the point where the latter is throwing off material cash flow, Moran said. SBA Communications in Boca Raton, Fla., for instance, is expected to generate more than $100 million in free cash flow from wireless carrier leases this year. Equity analysts describe free cash flow as operating income before depreciation and amortization but after capital expenditures.
"If you look back five years, the towers had, on average, one, maybe 1.5 tenants on a tower," Moran said in an interview with ASR. "That does not really provide a lot of cash flow, because you have the expenses to maintain the tower. Now, there are up to 2.5 tenants on your average tower, and the cash flow has grown nicely."
Tower leasing activity should accelerate in the second half of 2007 and through 2008, according to Moran's report. In 2008, new cell sites could jump by 12%, driven in part by emerging carriers whose activity level might double. Over the past two years, smaller wireless service providers increased leasing capacity and have raised significant capital to develop their cellular phone networks further, Moran wrote. MetroPCS and Kirkland, Wash.-based ClearWire, a high-speed, broadband Internet service provider, both raised funds through IPOs this year.
Overall in this year's first quarter, the industry grew its top line by 10% through core operations, Moran said. Tower companies have also been increasing their indirect sources of cash flow via land acquisitions. These companies usually lease the land under their towers, and such contracts usually include 3% annual lease increases. Buying the land, sometimes at 10 times the rental rate, reduces the highest operating expense that cell towers incur, thus increasing margins and cash flow.
Lastly, cell tower operating companies enjoy high barriers to entry in their markets, because a lot of municipal zoning laws shun new towers. That means existing structures will get more leasing business from wireless carrier tenants. Currently, cell tower capacity is about half full, Moran said.
"They have plenty of room to keep adding. It becomes almost like a protected business," he said.
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