During the last half of 2019 and early 2020, SteelTree Partners advised on the sale of several tower portfolios ranging from individual towers to mid-sized private portfolios. Some are traditional carrier led tower builds in highly difficult zoning areas with limited competing structures while some others can be best described as rural, unprotected by zoning, and subject to stronger than average competitive pressure from existing towers. While all these portfolios ended up selling, in some cases the process yielded comparatively disappointing results at lower than expected pricing.
Zoning Protection and No Competing Structures Are Still Essential.
The lesson we learned is that even with some scarcity of available portfolios, tower company buyers discount the value or outright pass on opportunities that they consider to distressed due to the perceived lack of lease-up potential. While, in general, it is still a seller’s market, the sale of these portfolios demonstrates that buyers are not willing to pay blindly for any tower assets. However, they continue to overpay for well-located desirable towers as evidenced by some market-setting transactions in early 2020 already. To assist future tower developers in evaluating potential build-to-suit tower opportunities, especially those considering a build-to-relocate tenants off existing towers strategy, we felt that it would be helpful to share some observations about questions intelligent buyers are asking in today’s “new world” environment.
Tower Location
⚬ Do any local zoning regulations (or other barriers to entry) prevent new towers from being built near the subject towers?
More than at any other time, buyers focus on whether the local zoning regulations would prohibit the placement of another tower near the subject towers.
⚬ Do the subject towers have significant competition from other existing towers?
Due to the willingness of large wireless service providers like AT&T and Verizon to consider relocation to other existing towers, buyers like to know that there are no existing towers near the subject towers that do or will serve a similar purpose. Lack of competing structures combined with difficult zoning regulations improves the odds for future co-location without undue interference from relocation tower providers.
⚬ Why did the developer build the individual towers or the portfolio?
Because some developers are intentionally building towers near other existing towers, buyers try to determine why the towers were built. Were they built for coverage or capacity purposes (or both)?
⚬ Is the portfolio regionalized?
Buyers like to see purpose-built concentrations of towers due to more efficient maintenance, marketing, and operation.
Tower Tenants
⚬ Who is the anchor tenant?
Especially for more rural locations, buyers are looking closely at who the anchor (first) tenant is on the tower.
⚬ What is the ratio of broadband to narrowband tenants?
Buyers prefer broadband equivalent tenants, i.e., cellular, government, utilities, and FM and TV broadcasters. Narrowband tenants, such as paging, mobile radio, and WISPs, are not valued as highly primarily because of lower expectations of longevity related to those leases.
⚬ How creditworthy are the tenants on the tower?
Buyers also assess the creditworthiness of the tenant roster to determine longevity and churn risk.
⚬ What is the exposure to possible terminations from proposed or previous mergers?
With the possible Sprint/T-Mobile merger, buyers will examine the exposure to possible terminations due to the merger. Buyers will also look closely at MetroPCS, Cricket, and Clearwire leases for possible termination.
Tower Tenant Lease Terms
⚬ What are the rent and escalations?
Older leases tend to have higher escalations. Presently, some developers are accepting lower than normal escalation rates in their leases, which can damage the value of a portfolio.
⚬ Is AT&T on the tower and are they paying above market rent?
On a recent portfolio with a high percentage of rent coming from AT&T high dollar collocation leases, the range of offers was broader than normal as some buyers discounted the multiple applied to AT&T rent to adjust for added risk of having to renegotiate. Because this specific portfolio saw significant zoning protection, some buyers didn’t care.
⚬ Is there a claw back to the anchor tenant if additional tenants co-locate on the tower?
Many newer built-to-suit leases include reductions in rent to the anchor tenant when subsequent co-locators come on the tower. Buyers prefer that there is no claw back clause in the tenant lease.
⚬ Do the tenant leases allow for additional revenue when modifications by the tenant are requested?
Buyers scrutinize the tenant agreements, especially newer leases, with the major carriers and look to avoid the cumbersome terms some developers are conceding to these days.
⚬ What are the general termination rights?
Buyers like to see leases without termination rights vested in the tenant during each term. They do not like to see liberal termination rights. This is especially true if there is no zoning in the area or there are competing structures.
⚬ Are any expenses passed through to the tenant?
While it isn’t that common, buyers prefer that the tenants be responsible for reimbursing the tower owner for some expenses, such as insurance, compound or road maintenance, and taxes.
Ground Lease Terms
⚬ Who pays real property taxes on the property?
Some leases require the landowner to pay all taxes, while others do not. Tower buyers prefer that the landowner pay all taxes.
Is there a revenue share clause within the lease agreement?
For obvious reasons, buyers prefer not to share revenue with the landowner. A revenue share provision will devalue the tower.
⚬ Are there prohibitions/restrictions on the sale of the lease to third parties?
This may include a right of first refusal or an outright prohibition on the sale of the lease to third parties. Buyers prefer that the lease contains right of first refusal language.
⚬ Does the landowner need to consent to assignment or subleasing?
Tower companies prefer not to have to go to the landowner for consent to assignment or subleases because landowners generally take time to review requests.
⚬ How much time remains on the lease until final term expiration?
The shorter the remaining term, the more likely the tower owner will incur an increased lease rate at expiration and resultant higher expenses for operating the tower.
Tower Specifications
⚬ Do the assets have additional structural capacity?
If the assets do not have sufficient structural capacity for additional co-location or modifications, the buyers will reduce their offers. Buyers like to see recent structural analyses and manufacturer drawings to confirm structural capacity and determine what is needed structurally if further modification work on the tower is required.
⚬ How old are the towers?
Towers with less lease-up over time are more likely to continue to suffer from below-average lease-up in the future.
⚬ How many towers have FAA required lighting?
This isn’t a material issue for buyers, but it does result in slightly lower offers for towers due to the additional expense from monitoring and powering FAA notification lights.
Intangibles
⚬ Who is the developer?
Buyers like to work with established developers who have refined their business processes. They also like to work with developers with a known track record for developing good towers.
⚬ How does this portfolio fit into the tower buyer’s general or specific acquisition strategy?
Some buyers look to buy assets that mirror their existing portfolio’s location or growth profile. Others look to fill in their portfolio with more or less mature towers than those in their portfolio so that they have a more rounded portfolio.
Collectively, these factors account for most what tower buyers are looking for in today’s market. Make no mistake, it is a seller’s market and buyers are paying high premiums for good towers. However, the first portfolios of towers built with a relocation strategy are coming to market, and the reception hasn’t been as good as some developers might have hoped. Direct experience leads us to believe that valuations for such assets may not yield much of a profit when compared to more traditional inventory and, therefore, may not be a sustainable business model.
Curious how your portfolio fits into today’s market? We will be attending Connectivity Expo 2020 in Miami this coming May and would welcome the opportunity to meet and talk about your towers. If you aren’t attending, but still want to talk, we are available anytime. Reach out to us here to request a meeting or discussion.
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