Case Study: T-Mobile Wants to Triple Your Rooftop Cell Site — Should You Let Them?

We reviewed the Elliott Management slickly produced attack on Crown Castle ($CCI).  In short, Elliott Management believes that CCI has underperformed its peers, American Tower (AMT) and SBA Communications (SBAC).  While the underperformance is clear, I also think that Elliott Management’s analysis (carefully?) fails to give any credence to the opportunity that fiber/small cells may provide to Crown Castle that its peers will miss if small cells take off.

WHERE IT HITS

1. 1. I agree that foreign investment in towers is preferable – we have been pointing to American Tower ($AMT) among the Big 3 as our top pick for a few years now based primarily on the diversity of their international portfolio and their focus on new-builds. 
   2. I don’t understand why CCI’s management abandoned international tower development or acquisition while focusing on fiber acquisition.  They aren’t mutually exclusive and CCI was just as privy to the 3G/4G cycle of growth in the US that is occurring internationally now. 
   3. I agree that CCI is better positioned in the US for 5G buildout on towers  (we previously did point by point analysis on Rural/Suburban/Urban towers for big tower companies and came to similar results- also looked at # of competing towers per tower company tower and CCI was generally higher than its peers which shouldn’t matter as much anymore given the reduction of new macrocell builds).
   4. I suspect that CCI could do a better job managing the fiber business side of their fiber acquisitions.  
   5. I believe that the window for the current strong growth on existing towers in the US will be strong for the next 3-4 years and then start to taper, while international will stay strong or even accelerate.
   6. One point not mentioned in the analysis but favorable to Elliott’s guidance is that CCI’s focus on small cells has likely negated some of their strength in negotiating Master Lease Agreements (MLAs) with the wireless carriers vis-à-vis their competitors who can afford to be “ornerier”.    

WHERE IT MISSES

1. 1. There is very little analysis of the future of CCI fiber/ROI as it pertains to small cells in the US.  I am unsure from the writeup whether Elliott simply doesn’t believe lease-up will occur or they are ignoring what has to be CCI’s main justification for their strategy. Elliott’s analysis shows tower level economics but omits entirely any small cell economics. Elliott’s writeup is solely focused on near term ROI.  If near term ROI is the only metric of concern, then no company would have pursued new build towers in the nascent days of cellular nor would any company pursue a multi-tenant small cell fiber centric build. It took two decades for the wider investment community to appreciate the tower model.   
   2. I believe it is too early to tell on the possible success/failure of CCI’s small cell strategy.  We don’t see how CCI can’t significantly increase ROI in the short term without changing the way they build fiber- which would negate the upside from future small cell deployments which require greenfield builds to see higher collocation rates
   3. I agree though that the time horizon for ROI seems to be pushing further out than expected.  We also suspect that the time horizon on maturing these “immature assets” is longer than CCI expected.  We don’t know if this is because of poor execution or unrealistic expectations.  (If the latter, then we had unrealistic expectations as well).  Other than Verizon, the wireless carriers haven’t adopted small cells as fast as we might have expected.  Elliott’s writeup ignores completely 
   4. Eventually, the providers will focus on small cells.  Whether they will rely upon CCI or self-build or otherwise will depend upon how much impact Verizon’s aggressive build plans have on subscriber retention/growth.  The more success Verizon has, the faster the other carriers will need to deploy which will be beneficial to the lease-up of CCI’s fiber holdings. 
   5. I also believe there should be upside in the future especially to smaller entrants to the market who need a mobile strategy (or MVNOs that want to reduce MVNO costs)  

WILL THIS CHANGE HOW CCI REPORTS ON SMALL CELLS?

 I am hopeful that Elliott’s missive causes CCI to provide more transparency on their small cell success or lack thereof. I have found CCI’s reporting to be cryptic especially how they treat collocation of small cells and in their sharing of details related to typical MLAs.   Unlike towers where the economic model is simple and transparent, CCI’s small cell program is an enigma. It is difficult to verify or analyze and, in that regard, it makes me (and I assume investors) suspicious of CCI. There seems to be a lack of clearly enunciated goals (at least to the investor community) related to small cells.  CCI has benefitted from being part of the less understood 5G investment opportunity window where anything 5G related is attractive.  However, as the allure of the “shiny bauble” of 5G fades and its reality (positive and negative) develops, investors large and small are starting to ask more intelligent questions which will require better information from CCI than is currently provided.  

Peppertree purchased 1,000 towers from AT&T for $680M in 2019. These are towers that were primarily built after AT&T last sold towers to Crown Castle in 2013.  Peppertree formed Octagon Towers with the AT&T towers.

WHY IS OCTAGON CONTACTING ME?

Octagon is reaching out to landowners for two reasons. First – to get authorization to assign the lease from AT&T to Octagon. Whether a landowner needs to consent to the assignment is based upon their AT&T ground lease. Most of the time, the ground lease provides that AT&T may freely assign to other companies.  Unless your lease says otherwise, you likely won’t be able to charge for consenting to the assignment.

Secondly, Octagon is calling landowners who have recently purchased AT&T towers on their property and asking them to extend the ground lease.  If you receive an offer from Octagon to extend a lease that doesn’t include an increase in rent or a sizeable signing bonus, we don’t recommend extending in most cases.

HOW WE CAN HELP

If you are contacted by Octagon regarding your AT&T tower lease, please contact us and we will help you understand whether your lease is undervalued.  We are not affiliated or related to Octagon Towers, AT&T, or Peppertree Capital.  We will advise you when and under what terms it makes sense to extend.  Do not extend just because they claim the tower will be moved.  Other than extremely high rent situations ($3,000/mo or more), it is very unlikely that the tower would be moved.

Why would they not include the cell towers?

The article suggests that the annexation of the property was against the provisions and requirements of the lease. I started to wonder what clauses of the lease could prevent the annexation. First and foremost might be just the presence of the cell towers. The developer may have planned to terminate the leases and move the cell towers only to find out how expensive that would have been. Having assisted clients with negotiating early relocations with tower companies, they aren’t easy or cheap.  I could see why a developer might choose not to relocate the towers and end up planning around them.

Alternatively, the lease may prevent the landowner from changing the zoning of the parcel without the consent of the tower owners. This clause exists so that landowners can’t rezone a parcel to where the towers are no longer allowed.

Lastly, there may have been what we call “reverse setback” issues.  This is where a city or county limits what can be built within certain distances of a cell tower.

I suspect that when these leases expire, they won’t be renewed. Or, the lease rate may be higher than ATC is willing to pay.   However, one has to question whether the present value of the lease payments exceeds the value of the “donut” land for housing development.

Perhaps the Verizon agent made the same mistake we made initially and failed to review the drawings carefully. Or perhaps Verizon’s agent attempted to characterize these units as radios instead of antennas because the lease expressly forbids the addition of antennas without the payment of additional rent. Perhaps they didn’t care to let our client know that they are adding new frequencies to the rooftop- which would also require landowner approval because the client is a municipal public safety agency. This is an uncharacteristic “mistake” for Verizon whom we have found to be straightforward to deal with in most cases with the exception being when they have retained lease optimization companies like Md7 to renegotiate their leases.

First Lesson Learned: Review All Construction Drawings Carefully

Going forward, building owners and tower owners should CAREFULLY review proposed drawings from Verizon (and other carriers). If you are asked to “consent” to equipment modifications, we recommend always first asking for construction drawings. Then if the carrier indicates that they want to replace existing radios, ask them specifically for specification sheets for each remote radio and ask them if any of the “radios” are combination radios and antennas. Each lease is different, so your lease may allow the carrier to make these changes without your consent or authorization. Either way, smart building owners and tower owners should be fully aware of all equipment being added to their tower or rooftop.

Second Lesson Learned: Expect to See More CBRS Antennas Added on Rooftops and Towers

Verizon’s intentions to deploy CBRS outdoors are by no means secret.

We have observed small cell applications with 3.5GHz capable equipment included in the past. However, this is the first time that we have seen Verizon adding CBRS to a rooftop macrocell. This is a good indicator of the mainstream use of CBRS and possibly of Verizon’s intentions in the upcoming CBRS auction which the FCC still has yet to set a date for. For more on CBRS, see https://en.wikipedia.org/wiki/Citizens_Broadband_Radio_Service.

We also expect that we will be seeing more of these installations especially in urban and suburban areas as Verizon looks to CBRS to help meet the pending demands of 5G.  If you a landowner or tower owner and are unsure how to review and address these types of requests from Verizon or other carriers, see our page on Equipment Modifications and Lease Expansions for more details.  If you are an investor and want to know what impact these types of CBRS installations will have on the public tower companies (AMT, SBAC, CCI), contact us for a consultation.  If you want to see more of these types of articles, please sign up for our newsletter on the form below.

For us, it is difficult to price the amendment because the lease does not allow restriction of equipment based upon the specific frequency, but only on the size, weight, and the number of the antennas. Thus, if the merger occurs, we can make it more difficult for T-Mobile to merge the equipment and terminate the Sprint lease, but not impossible. However, if the merger does not occur, if the client signs an amendment that could allow Sprint to terminate their lease regardless of what happens with the merger.
When we inquired with the T-Mobile agent about making the amendment contingent upon the merger happening or not, we were told that T-Mobile’s legal department would never agree to such a limitation.

Is there a backup plan like spectrum sharing?

T-Mobile’s desire to sign the amendment but unwillingness to make it contingent upon the merger makes me wonder whether there is an alternative plan in the works in the event that the merger is not consummated. This could be a spectrum sharing agreement. This isn’t unprecedented- see this article. But in that case, the spectrum to be shared was PCS spectrum (1900 MHz), not Clearwire’s spectrum (2500 MHz). Thus, the existing agreement would need to be revised or a new one entered into.

Sprint has the spectrum but is a dead company walking without additional capex to deploy 5G. Over time, the distinction between those who invest in 5G specifically in densifying their network will prove greater than that with LTE and 4G. T-Mobile desperately needs mid-band spectrum as running 5G on 600 MHz will be sufficient in areas where there isn’t a significant amount of traffic but will limit their overall network performance elsewhere.

So What to Do?

First, off, it is hard to generalize a course of action that works for every site. Each situation will be different and tied to the specific lease language and exhibits. In this case, the easy but ultimately unfruitful answer is to either reject the request altogether or ask that the amendment rent match that which would be lost with a Sprint lease termination. T-Mobile won’t agree to the latter option so the only option we see is waiting until there is further clarification on the merger . The lawsuit filed yesterday by 10 states against the merger may delay the process and certainly makes the merger probability less certain.

We are curious about what others have done or will do in a similar situation. If you have successfully negotiated through this issue, please either leave a comment here or contact us or private message us if you don’t care to take it public.

In just the last week, we have received five separate inquiries from past and potential clients who had recently received a cell tower lease buyout offer that was noticeably better than ones they had received from the tower company previously. Those who reached out felt that there must be something going on in the industry. They are asking the question, “Is this related to 5G?”

Yes – Offers Are Related to 5G

There is so much hype about 5G out there now – it is hard to pick up a newspaper or browse the web without seeing multiple articles on what 5G is and what it can be. The investment community has definitely taken notice. We are seeing more new entrants with serious funding ready to purchase leases than we have since 2012-2013. We have been contacted by multiple financial groups who desperately want to “get in” on 5G and are seeking our consultation on how to do so. These groups sometimes have more conservative Return On Investment criteria and are willing to make higher offers as a result.

Tower Company Valuations Are Up.

It doesn’t hurt that tower company stock prices are up as well. Both American Tower Corporation ($AMT) and SBA Communications ($SBAC) are at all-time highs as of the end of May 2019, and Crown Castle ($CCI) is near its all-time high. When tower company stocks are up, they have more capital to purchase leases. Coupled with the low cost of capital and their recent conversions to REITs, tower companies have every incentive to convert leases (long-term operating expense) to easements (upfront capital expenditure).

Make No Mistake – It Is A Seller’s Market.

As new buyers come into the industry looking to acquire assets (leases or towers), the tower companies are forced to be more aggressive in their offers to purchase or extend their own leases lest they lose the lease to a third party that looks to capitalize on the lease in the future. Tower companies do not want to have to deal with a third-party owner, who is better informed than the landowner in most cases. The net result is that landowners are receiving escalated offers from the tower companies for lease buyouts and for lease extensions. One downside, though, is that the efforts by some of the outside agents who are trying to close these deals are getting more egregious, with some outright lying and suggesting to landowners that towers are going away due to 5G and small cells. (HINT: they wouldn’t be buying or extending if the towers were going away!)

Landowners now have more options than ever to sell their lease or to extend their lease. Tower companies and third-party lease buyout companies are becoming more creative in their offers. One of the techniques that they use to inflate their offers is to use payments over time. By showing you the overall amount they will pay, they hope that you aren’t smart enough to understand the time value of money and the additional risk you take on by doing a lease buyout under an installment payment plan. Either way, the offers are getting better, which is encouraging landowners to consider selling or extending. Clients we advised years ago are getting offers that are at or above what we recommended they ask for.

But It May Not Be The Perfect Storm.

We previously thought that the market couldn’t get much better given that interest rates are so low and tower company stocks were high at the time. Candidly, we don’t know. It remains to be seen whether the new entrants to the market are capable and serious. In Steel in the Air’s 15 years, we have seen multiple investors look to enter the sector but bow out when they realize how hard it is to scale the acquisition of leases or towers.

There are other factors that could influence offers positively or negatively. Will interest rates climb and cost of capital increase, thereby making it more expensive to buy leases? Will the tower companies continue to be the darling of the stock market as investors chase anything related to 5G? Will Sprint/T-Mobile be able to pull off a merger? If they do, will a fourth wireless carrier enter the market?

Need Help Deciphering Your Options?

We can help. We have advised 3,000 clients over the last 15 years with over 4,000 assessments. We track data from thousands of lease buyout and lease extension offers. Our breadth of data allows us to identify trends in the market when they start, not follow them after they have already changed direction.

We can provide consulting services on lease buyouts, andlease extensions/expirations. We can broker your lease(s) or tower(s) to maximize your sale price. We can help you determine whether you should consider selling, consider extending, or simply keep the lease as is for now. Our clients run the gamut from individual landowners to large multi-national corporations to large cities.

We welcome the opportunity to discuss your situation with you further. There is no cost for the initial call, and we do not pitch you services that you do not need. You may be worried about getting added to a mailing list or being called repeatedly if you take us up on our offer of a free initial consultation. Don’t worry! Just let us know up front and we will make sure you never hear from us unless you want to.

Call us for a free initial consultation.

First a little background. In late 2017, Lendlease (a global infrastructure company that has formed a tower company) and Softbank (majority owner of Sprint) formed a joint venture to acquire 8,000 cell sites from Sprint across the US. We believe that these acquired sites are mostly rooftops. We suspected at the time that this was a financing transaction that Sprint entered into because it knew that if a Sprint/T-Mobile merger came to pass, Sprint might end up terminating a good number of those leases. We suspect that Lendlease/Softbank paid a reduced value for the leases as compared to what the market was paying, probably because both parties knew of the potential risk from a T-Mobile/Sprint transaction. You might ask why Lendlease/Softbank would buy these leases if there was potential risk? There are three reasons:

1. They know how long Sprint is likely to continue using those leases or have negotiated a guaranteed term.

2. They intend to try to “remarket” the Sprint lease space to other carriers if and when Sprint terminates.

3. Lendlease sees the potential to renegotiate with building owners to expand the Sprint lease area and, even if Sprint doesn’t terminate, still lease space to other carriers.

Fast forward to today and building owners whose Sprint leases were acquired by the Softbank/Lendlease joint venture are being contacted by third parties like Tower Alliance to “renegotiate” their leases. Tower Alliance (hired by Lendlease to renegotiate on the JV’s behalf) shares industry articles like “A merged Sprint/T-Mobile will shutter 25,000 towers, and Crown Castle with suffer most” and “Sprint and T-Mobile to Merge, in Bid to Remake Wireless Market”.  The email our client received contains these articles and includes the following justification:

It was a pleasure speaking with you this morning. The intent of my telephone call and this follow up email is to inform you of the project currently underway in the US by the Sprint/Lendlease Joint Venture as described in the press release and Letters of Authorizations. Sprint is assessing all of its rooftop network real estate in order to assure maximum cost efficiency. It has relocated many sites that are not efficient. The site as referenced above currently remains one of a group of sites identified as a cost efficiency target in the Sprint/Lendlease Joint Venture. In addition, I have attached some press releases speculating on the outcome of the announcement regarding the possible merger of Sprint/T-Mobile for informational purposes only. My goal is to have an amended and restated lease executed once we have negotiated the most favorable terms for the mutual benefit of both Landlord and Tenant.

Before we go on to the “ask” from Lendlease and why we recommend that building owners don’t consider it seriously, we have to question the statement, “It (Sprint) has relocated many sites that are not efficient.” Unless they are referring to lease decommissions from the Clearwire/Nextel portfolios, we are unaware of any sites that have been relocated by Sprint due to cost efficiency. Perhaps there are some, but we haven’t seen them.  At any rate, we highly doubt many is more than 50.

Tower Alliance on behalf of Lendlease then asks for a number of concessions from the building owner on the new lease, which we have listed below along with our thoughts on why such changes are ultimately really bad for the building owner.

What happens if the landowner doesn’t agree to these really bad terms? Tower Alliance suggests that “if we aren’t able to come to a new agreement, the tenant will be forced to evaluate alternative site locations.” Note that they don’t say they will terminate the agreement – there has been litigation previously between landowners and another carrier that clearly prevent carriers from saying they will terminate if they don’t get their desired terms. However, the language is carefully worded to imply that termination is a risk. In reality, by not signing, in most cases, the landowner will be in exactly the same position both now and in the future. Sprint is either going to terminate or not. Another replacement carrier will either be interested in your rooftop or not. This deal doesn’t change either of those eventualities for most landowners. There will be a small subset of high-dollar Sprint rooftop leases where Lendlease may end up terminating and moving to a new rooftop. But for most landowners, this proposal from Lendlease is not a good deal and is one we would advise against. If Sprint and T-Mobile don’t merge, there is even less of a reason to agree to these terms. Fundamentally, we don’t like this type of renegotiation effort and will strongly counsel our clients against agreeing to these terms.

Got a Sprint lease and feel anguish over what to do? Contact us and we will be happy to discuss your situation and identify whether we can provide any value to you in your decision-making process.