AT&T Wins FirstNet but TowerCos are the Real Winners

FirstNet Award to AT&T Confirmed: Checks Confirm Amendment Activity before Official Announcement

Tickers: T, AMT, CCI, SBAC

Tags: Ken Schmidt, Wireless Infrastructure

In Examining FirstNet Assumptions 12/9/2016, we reviewed the likelihood that AT&T would win the FirstNet RFP and the impact on TowerCos, Equipment OEMs, and FiberCos. As the time, the FirstNet award was stalled pending litigation over Rivada's claim that it was improperly excluded as a bidder. No timeline for resolution was available even as 2017 models were being fine-tuned across the Street. In our AT&T FirstNet Revisited note from 3/21/2017- we correctly suggested that the award would happen this week- which it did today.

In our previous notes, we pulled forward our expectations for AT&T's deployments of FirstNet-capable equipment by 1-2 quarters. In general, FirstNet site modification work is a positive for the TowerCos, and their 2017 guidance (given on Q4 calls) does not include FirstNet.

 

FirstNet Contract Review:

In review, AT&T gains a long-term contract to utilize 20MHz of 700 MHz spectrum to accompany the up to 5-10MHz of the 700MHz spectrum they already have across approximately two-thirds of the US. Carriers prefer low band spectrum for its ability to penetrate buildings and because it propagates further than the higher bands.

AT&T also gets $6.5B in cash from the Federal government to facilitate the development of the first responder and public safety network. This amount could be less if not all states opt into AT&T's plan, which they are entitled to do, provided they build their own statewide Radio Access Network subject to the provisions of the Act.

Lastly, AT&T also gets a "sticky" market of 3 to 5 million public safety users, which is a market that AT&T has historically underserved.

AT&T has indicated they expect to spend over $40 billion over the next 5 years to build out FirstNet. (We believe that this number includes other non-FirstNet related modifications).

 

Buildout Timeline:

Under the RFP, AT&T is required to develop a public safety network on a certain schedule. Assuming an April 2017 award date, here is how the network will be deployed:

  • October 2017: States Opt-In or Opt-Out
  • April 2018: 20% of coverage to be built out
  • April 2019: 60% of coverage to be built out
  • April
    2020: 80% of coverage to be built out
  • April 2021: 95% of coverage to be built out
  • April 2022: 100% of coverage to be built out

AT&T will be required to develop and obtain approval for suitable devices, applications, and back-end operations and infrastructure to enable FirstNet capabilities. Initially, AT&T can use its network and devices but will eventually need to develop FirstNet-specific devices and infrastructure per the requirements of the RFP. Furthermore, AT&T will need to pay FirstNet at least $5.6B over the 25-year term of the contract with annual fees starting at $80M and escalating from there.

    

Implications for TowerCos

As far back as December, we indicated that TowerCos would benefit from the award, though we cautioned that there are three buckets of sites: some AT&T sites which already have antennas capable of transmitting/receiving in the 700MHz band, where there would modifications that do not justify a rent increase or amendment; some that require antenna change outs and additional remote radio units, and some that require additional antennas and remote radio units.  In the second and third bucket, the TowerCos come out ahead.  In total, we estimate the number of AT&T macrocells that will be touched over 5 years will likely exceed 75% or more of AT&T's total site count.  

Regarding the timing of the amendment activity, our checks show that AT&T was submitting applications for modifications at the end of 2016 that include equipment suitable for FirstNet—months before today's FirstNet announcement.

 

Implications for Landowners and Rooftop Owners

Landowners with AT&T towers on their property, for the most part, won't receive any additional rent due to FirstNet activity.   If AT&T ends up hardening sites by adding generators or backup power, there may be some lease area expansions which could yield additional rent.  Building owners with AT&T rooftop leases may see additional revenue as AT&T needs to modify or expand existing equipment and antennas on the roof.  For those building owners who previously agreed to AT&T's E911 language that they were inserting into their leases that states that AT&T is allowed to make changes to sites if needed for E911 purposes, there may not be the opportunity to charge additional rent for changes even if they exceed the current footprint of the equipment area.

 

Minor Boost for Rip-n-Replace Towers

Ironically, a subset of activities related to FirstNet deployment could cannibalize existing TowerCo revenue. As discussed in our Rip-n-Replace note of 3/22/17 where we discuss the increasing willingness of wireless carriers to relocate equipment from existing towers, the more that AT&T modifies or adds equipment, and particularly in cases where there are changes to the structural loading on an existing tower, the more an adjacent alternative site may make sense.

The more equipment that AT&T needs to add, the greater the structural loading on the tower. The greater the structural loading, the more likely that structural modifications to the tower will be required. The more that structural modifications are needed, the higher the pass-through to AT&T. The higher pass-through, the greater the incentive for AT&T to relocate to a newly built adjacent tower with surplus structural capacity.

 

Want to Know More?

We have strong opinions on who stands to gain from the FirstNet award to AT&T.  Give us a call– we can break down which equipment manufacturers, which construction and engineering companies, and which tower companies are best positioned for upside from FirstNet.

Everest Infrastructure Partners: The Phoenix of Tristar Investors?

Illustration of Phoenix Rising from AshesHISTORY OF TRISTAR INVESTORS

Back in 2008-2013, a company called Tristar Investors was attempting to acquire ground leases under American Tower Corporation (AMT) and Crown Castle (CCI) cell towers. They had some success acquiring the leases using a unique acquisition model where they would "buy out" the tower ground lease by paying the landowner an additional annual or monthly payment above and beyond their current rent through the expiration of the cell tower lease. Tristar would then offer the landowner 50% of any revenue from the operation of the tower after the expiration of the lease. The marketing pitch? At expiration, Tristar assumes ownership of the tower and the landowner becomes a "partner" in the revenue generated on the tower. This was an effective pitch to landowners, and our best guess is that Tristar acquired 300-500 leases under valuable multi-carrier towers.   

In 2013, Tristar settled litigation with American Tower and after that, they shut down. We surmise that Tristar agreed to non-compete and non-solicitation language in their agreements that barred them from purchasing leases from under American Tower. We also believe that Tristar executives previously agreed to language with Crown Castle that provided for similar restrictions on acquiring Crown Castle leases.  

THE RISE OF EVEREST INFRASTRUCTURE PARTNERS

Flash forward to 2017 and it appears that these non-compete/non-solicitation agreements have expired, because a landlord of ours with a multi-carrier American Tower Corporation tower received a purchase offer from a company named Everest Infrastructure Partners that looks suspiciously like previous offers from Tristar Investors. Upon further review of the signatory and the agent who contacted our property owner, it appears that someone has gotten the old Tristar team together and is now attempting to acquire leases under the Everest Infrastructure Partners name. Both the agent and signatory list previous positions with Tristar in their LinkedIn profiles .  

Here is what the offer from Everest looks like: 

Everest Infrastructure Partners, Inc. (“Everest”) is pleased to present to you (“Owner”) this offer letter (“Offer”) for Everest to acquire an easement to the cell tower real estate you own at _____________________(“Property”).    

1. Current Lease.  The Offer is based on the following terms of the current lease for the cell tower operated on the Property:

Current Rent:   $xxx.00 /month    Final Lease Expiration: xx/xx/xx

2. Payment to Owner.  Everest will pay to Owner the sum of xxxxx Thousand and No/100 Dollars ($xx,000.00) per year until the expiration of the Current Lease.  Owner will keep all rents generated by the Current Lease until expiration. Additionally, commencing at the expiration of the Current Lease, Everest shall thereafter pay to Owner ongoing payments equal to Fifty Percent (50%) of the rental revenues received by Everest from any lessee(s) of the Property.

 3. Easement. In exchange for the consideration above, Everest will be granted an easement to the property. The easement area shall be the portion of the Property currently leased for wireless telecom use, and shall include access and utility easements thereto. 

RECOMMENDATIONS FOR CELL TOWER LEASEHOLDERS

There are a few concerns that landowners should have about this offer. First, a landowner who receives this offer should clarify with Everest whether they intend to take over the ownership of the tower at expiration, whether they plan to sell the lease back to the tower company, or whether they expect to renegotiate the lease with the tower company and take 50% of the rent for doing so.   

In the first scenario, these types of offers can be attractive to landowners. Our clients who previously sold to Tristar were generally better off for doing so.  

In the second scenario, we believe the landowner is better off just selling or renegotiating the lease with the tower company. Otherwise, at expiration, if Everest sells the lease to the tower company, the tower company could just decide to offer below market lease terms and the landowner would get the very short end of the deal.   

In the third scenario, we also believe that the landowner is better served by selling to the tower company or renegotiating the lease with the tower company. Unless the "buyout" amount exceeds the present value of 50% of future rent from the extended tower lease, the landowner would be better off just keeping the lease and negotiating its own extension or sale with the tower company.   

Accordingly, if you receive an offer from Everest, we recommend confirming with them whether they intend to take over the tower at expiration. If not, we suggest asking Everest about their explicit intentions with the lease. In either of the latter two scenarios, we recommend contacting us so that we can help you determine the value of the lease and explain fully all of your options – not just those presented by Everest.   

Please note that we are not affiliated with Everest. Everest Infrastructure Partners may be a registered trademark. If you found this post while searching for Everest Infrastructure Partners, please direct your browser to www.everestinfrastructure.com.   

AT&T Shifting Capex into Small Cells

Implications: T, S, ZAYO, CCI, AIRO, COMM, DY, ERIC, NOK  (Disclosure- author holds position in ZAYO)

Looks like T's finally cutting over to small-cell investment as S continues to under invest.

Carrier capex budgets for 2017 and forecasts for 2018 aren't out yet, but our checks indicate that AT&T, which has to-date been a relative holdout on small cells, is finally shifting investment share in this direction.

Back in June, T highlighted that 90% of its next-5-year macrocell infrastructure was already in place, but only 5-10% of the small cell infrastructure for this same period had been built.

Checks now show that T is beginning to reassign real estate department personnel to work on small cells. Furthermore, some subcontractors are reporting increased requests from AT&T to do site walks for small cells.

Notably, we are not yet seeing increased municipal permitting / leasing. Given 9-12 month lead times, this suggests that small cell ramps will occur toward the middle of 2017 with a likely acceleration into 2018.

We anticipate that T will focus its small cell efforts in Wireline markets where the company already owns existing fiber and has access to Right of Ways and Franchise Agreements. T will best be able to control costs in these areas where it is already considered a wireline utility and has existing infrastructure in place. These markets include most of the Southeast and Midwest as well as a few markets in California.

Map showing the states in which AT&T has wireline service
AT&T -Landline Markets before CT was sold (Image from AT&T)

Implications

 We see this shift as an incremental positive for fiber providers and small cell operators like ZAYO, CCI and CSAL; although the effect is likely to be muted to the extent that their metro fiber overlaps with AT&T's. It's a likely positive for OEMs like AIRO and COMM that provide small cell equipment and antennas but don't have exposure to the decline in macro cell equipment.  Implications will likely be mixed for DY, NOK and ERIC. They should benefit from increased small cell work but are already seeing reduced capex allocated to macro cells.

Sprint Follow-up

Related to our past comments on Sprint, (see 10/26 – Sprint (S) still behind small cell 8-ball), we continue to see additional data points supporting our thesis.

Sprint confirmed during their last earnings call that last year’s Capex was lower than their previous guidance to the market by $2B ($2.3B actual vs $5B guidance).  Sprint has been talking up its plans for years with relatively little to show for it, and recognition seems to be building throughout the marketplace, and the investor community, that the Mobilitie relationship has yielded far fewer small cells than were anticipated.  Sprint is giving lip service to 2017 being a better year for permits and capex, but its hopes seem to be predicated on FCC leadership changes and possible rulemaking to remove impediments to small-cell deployment in right of ways.  In fact, Mobilitie seems to have pinned a significant amount of hope on a Petition to the FCC for Relief.

We think Sprint's capex will increase in 2017 off of an ultra-low 2016 number, but the service provider continues to struggle to deploy capex dollars.  We wouldn't be surprised to see major revisions to the strategy as well as Street expectations.

 

A Tale of Two Small Cell Providers – Part Two

Last year in April, we wrote about how Crown Castle and Mobilitie respectively approached the City of Orlando regarding small cells.    In that post, we described how each company approached the application process and why the City approved the Crown Castle small cells while it determined that the Mobilitie applications were incomplete.

We recently came across some data from Montgomery County, MD.   If you have followed wireless siting news, there have been a number of stories about Montgomery County and the opposition for small cells from NIMFYs.

Interestingly, the data shows a similar story happening in Montgomery County as that which happened in the City of Orlando.  Of the 171 small cell or DAS installations submitted by Crown Castle, 81 have been approved or recommended for approval.   90 are under review currently.   Of these 171 poles proposed by Crown, only 20 are new poles as opposed to installations on existing utility structures.   The average height of all Crown poles/antennas is 28 feet.   Another interesting statistic regarding the Crown DAS poles is that 26 of them have two carriers coming out of the ground.   Almost all include Verizon- but some include T-Mobile.

Mobilitie has taken a different tact and not surprisingly, NONE of the 141 small cells that Mobilitie has applied for have been recommended for approval as of the date of the file we reviewed which appears to be October of last year.   The average height of the Mobilitie poles- 66 feet.   The number of new poles vs attachments to existing poles is 117 to 24 respectively.

Lastly, Verizon has submitted 15 small cell applications of their own.

Below is a map we created in Google Maps showing the various DAS and small cell providers and the submitted infrastructure.   You can click on the individual points for further details on who is where and whether the sites have been approved.  (here is a link to the map itself in Google Maps)

 

Steel in the Air – Wireless Predictions for 2017

2017 Start button

As we have done in years past, we look ahead to 2017 and share our forecasts for the coming year. All things considered, 2016 was a mediocre year for the industry. 2017 looks to be all about repositioning – meaning that while we don’t expect growth in CapEx, we do anticipate industry development in some areas and contraction in others. With that said, here goes:

1.  AT&T gets serious about small cells. Again.

For those of you who don’t recall, AT&T previously had an Antenna Solutions Group focused on both Distributed Antenna Systems (DAS) and small cell deployments. While most of the emphasis was on DAS, there were a decent number of small cell deployments, although nowhere near the 40,000 small cells AT&T led the industry to believe they were going to deploy. We believe that AT&T will end up increasing its capital expenditures on small cells this year at the expense of building new macrocells. However, that doesn’t mean that AT&T will stop investing in macrocells altogether – see the next point.

2.  AT&T wins the FirstNet RFP and starts to deploy both FirstNet and AWS-3 spectrum via site modifications to existing macrocells.

Per our previous notes, we (and others) anticipate that AT&T wins the FirstNet contract. As we have pointed out before, if AT&T has done 700MHz modifications at a site previously, the old antennas may be able to accommodate the additional FirstNet 700MHz spectrum, but that doesn’t mean they can accommodate AWS-3 frequencies. The AWS-3 spectrum is in the 1700MHz and 2100MHz ranges, and we are just starting to see modification requests from AT&T that cover the full range of the spectrum in both 700MHz and 1700-2100MHz bands. We anticipate that this continues. Note that this doesn’t mean that AT&T will pay more rent for all modifications.

3.  Verizon gets slightly more serious about small cells. Again.

In 2016, it seemed that Verizon had slowed down its deployment of small cells as compared to 2015. While we don’t have access to the number of small cells they deployed via Crown Castle, we do know that the municipalities that have retained us experienced a downtick in the number of new small cell applications. We suspect that Verizon has revised its strategy on small cells after discovering what does and didn’t work through trial and error in 2016. Previously extensive efforts by Verizon to enter master lease agreements with municipalities will pay dividends in 2017 as Verizon will experience quicker speed to market than other wireless carriers who haven’t negotiated such agreements in bulk.

4.  T-Mobile will focus on adding capacity to their network no matter how costly.

In 2016 T-Mobile negotiated and presumably signed a significantly increased number of leases to add equipment to existing DAS systems across the US. Furthermore, we have heard (but haven’t yet confirmed) that T-Mobile is entering collocation agreements on rural towers to avoid roaming agreements with rural carriers. Our experiences with rural tower-owning clients seem to confirm this – but we don’t know whether their leases are representative of what is happening with all tower companies. We surmise that T-Mobile doesn’t want to spend cash building its DAS networks or new towers, which is why they may be willing to agree to higher than average lease rates. We also assume that T-Mobile needs desperately to add capacity and to do it quickly – which supports why they would be willing to jump on current DAS systems and collocate on existing towers.

5. Sprint will continue to spend historically low levels of CapEx and somehow still convince market analysts that its spectrum holdings give it the flexibility to significantly limit spending on its network.

When Sprint announces its 3Q2016 fiscal year results in January, they will again surprise with lower than expected CapEx. Reduced lowered CapEx from Sprint could very well continue into the middle of 2017 based upon the limited activity we are seeing from Sprint now. Tower companies have already rightfully stopped projecting any income from Sprint in 2017 with the expectation that if it comes, we can all just be grateful. Despite these harbingers, market analysts will still continue to rate Sprint a Buy primarily due to the potential for a merger with T-Mobile which seems to be increasing slightly in probability every day. If Sprint seriously believes this merger will take place, they would be wise not to invest CapEx.

6. More fiber companies will be acquired and the values paid per route mile (especially metro fiber) will continue to increase.

We know that this isn’t that much of a reach regarding a prediction, but it is an important one nonetheless. 2016 saw several fiber acquisitions: Zayo/Electric Lightwave, Windstream/Earthlink, CenturyLink/Level3, and Crown Castle/Fibernet to name a few. Notably, both Zayo and Crown Castle are actively positioning themselves to be “the” small cell metro fiber providers. These companies know that fiber is the backbone of any 5G/small cell/fixed wireless network and that controlling costs of the fiber is paramount to the wireless carrier’s ability to keep pricing of wireless plans low.

7.   Speaking of fiber, landowners will receive more requests than ever before for new fiber routed across their property.

We are just starting to see requests from Verizon and other carriers to bring in “redundant” fiber from different cross-property routes from existing wireless lease utility easements. Our research shows that with the advent of small cells, and C-RAN particularly, companies like Verizon need redundancy and are willing to pay for a second utility easement across the property so that an aloof contractor cannot cut both fiber cables at a singular location. Unfortunately for large incumbent fiber providers, this fiber won’t be lit fiber.

8. 2017 will be the year of cell site hardening.

With FirstNet likely being awarded to AT&T, and the FCC’s recent order requiring wireless carriers to disclose the percentage of their sites that are out of commission during emergencies, we anticipate that carriers will begin improving power backup systems at individual sites. Cell site hardening will translate to more on-site generators, which means lease expansions and increased rent to landowners and tower companies. Sprint and T-Mobile will need to play catch up to AT&T and Verizon, both of whom have previously begun site hardening agendas.

9.  Wireless carriers are doing more than just talking about what they consider to be a lopsided relationship with the tower companies, and clear and demonstrable proof of this will emerge in 2017.

To date, tower companies have largely ignored inquiries and very public comments from the carriers about “expensive and unsustainable” collocation rents and modification requests. Despite some slight downward pressure on tower company stocks and analysts’ questions at industry events, the tower companies haven’t yet felt any real pressure from this carrier positioning. However, we believe strongly that the wireless carriers aren’t sitting idly by but are instead actively seeking to relocate some of their more expensive sites. Whether these efforts are selective and focused primarily on “scaring” the tower companies, or they represent actual and significant savings on operating expenditures going forward, we don’t know. Either way, we believe that there will be clear proof of the extent of these efforts in 2017 and that this will negatively impact the tower companies.

10. The carriers will not deploy any real 5G in 2017.

Despite claims to the contrary by Verizon and others about their 5G-like systems, they aren’t mobile, and they aren’t 5G. Mobile 5G specifications aren’t expected until 2020, and even pre-specification systems won’t meet the eventual 5G standards. 5G preparation will continue in earnest in 2017, to include robust fiber deployment and small cell site acquisition. None of this will prevent the carriers from saying they are deploying 5G. (Stay tuned on this topic- we anticipate doing a workshop for financial and tower company clients in NYC and Boston in February to address the common questions and concerns we have been hearing from analysts and reporters regarding 5G).

It is unlikely that these projections will be 100% correct – and if I had to pick one projection where we are more likely to be wrong (and where we hope we are wrong) – it #5, that Sprint won’t be deploying CapEx this year in any sizeable amount. The tower companies have fared well over the past year, considering the lack of any real, sizeable revenue growth from one of the “Big Four” wireless carriers.

If you disagree with any of our projections, we’d love to hear why. If you want further information about how we arrived at the predictions or wish to discuss the likely winners and losers, we welcome the opportunity to set up a private (paid) consultation to discuss our beliefs further. We have no confidentiality agreements in place with the companies listed above – and to the extent that we do have confidential information about them, we won’t disclose it.

Comcast Wireless 2.0- Maybe It Won’t Fail?

On September 20, Comcast’s Brian Roberts announced that Comcast Wireless a second iteration wireless venture is scheduled to roll out in mid-2017. While details have been limited so far, here is what we anticipate based upon 20+ years in the wireless industry. [Read more…]

Crown Castle Small Cell and Tower Update- 2ndQ 2016

New replacement pole small cell
New replacement pole small cell

While the call itself was pretty understated as compared to even other CCI calls, it was in the Q&A where the call got interesting.  Here is what we took from the call.

TOWERS:  ($115M organic revenue growth in 2nd Quarter)

New Builds:  In regards to new builds, CCI is not building many new towers- only 50 of them in the last quarter.  They don’t say it, but we believe that the majority of those towers are replacements of their existing towers where the underlying landowner wasn’t willing to extend the underlying tower ground lease at a fair market value rent.   Crown doesn’t expect this slow pace to change, noting specifically that there are a number of new tower company entrants or established mid-tier tower companies that will do non-sensible build-to-suit deals in order to establish market share. [Read more…]

Crown Castle (CCI) Small Cell Initiatives and Reporting

Crown Castle DAS Node
Picture of Crown Castle DAS Node from FCC Presentation by Crown

So as a clear indication that Wall Street is very focused on small cell initiatives by the public tower companies, Crown Castle
started reporting their small cell financials separately from their tower financials in the Q1 2016 quarterly earnings and call.   They must have been receiving a significant number of questions from the analysts because the earnings call presentation is carefully crafted to show a rosy picture even though Crown hasn’t been completely transparent on their small cell financials.

SOME VISIBILITY- BUT QUESTIONS STILL REMAIN

In general, we are excited to see them Crown add this reporting, as we have been suggesting to the various analysts that retain us that it is difficult to measure how successful their small cell efforts are without this breakdown. Unfortunately, Crown still isn’t distinguishing between small cells and DAS in the breakdown preferring to treat all DAS nodes and small cells as if they are the same and have similar financial attributes.  Interestingly, an analyst from Bank of America specifically asked this same question in the Q&A without getting a substantive answer.

What we do know from the earnings call is that Crown’s small cell business still amounts to approximately 12% of their consolidated site rental revenue similar to what it was in late 2015.  Crown indicates that new small cell builds amount to 75% of their small cell systems’ incremental revenue – while 25% is additional collocation on existing fiber routes/DAS networks. They suggest that they have 16,500 miles of fiber, but don’t disclose how many miles are actually used for small cell nodes or DAS.   CCI says they are focused on the top 25 markets which isn’t surprising given the location of Sunesys fiber in these same cities. This suggests a few obvious questions for CCI that were partially addressed in this call and should be expanded upon in future calls:

1.  How do they expect to grow once those 25 markets are complete?

2.  Now that the world is fully aware of the value of dark fiber and surplus capacity, is it reasonable to expect another fiber company acquisition?

3.  How many nodes are in top 25 markets or Central Business Districts (CBD) as opposed to non urban core areas? [Read more…]

Tale of Two Small Cell Proposals – Crown Castle vs. Mobilitie

The City of Orlando, Florida recently received two separate applications for two separate sets of DAS nodes and/or small cells. The applications were submitted by Crown Castle and Telemobilitie, both of whom purport to request planning approval for new poles and/or the replacement of existing poles. We believe that Telemobilitie is a “Doing Business As” name for Mobilitie – the applicant who submitted the plans to the City on behalf of Telemobilitie has a LinkedIn page indicating she works for Mobilitie, a company which is purported to be assisting Sprint with the development of 70,000 “mini-macro” small cell sites. [Read more…]

Key Takeaways from Crown Castle (CCI) 2015 4th Quarter Earnings Call

We reviewed the transcript and presentation materials for the CCI earnings call for the 4th quarter of 2015 and compared to the same call back in 2014.   Here are the things we found interesting from the call. [Read more…]