The novel Coronavirus has transformed overnight how our planet uses its digital infrastructure. Social distancing is testing the readiness of the digital infrastructure ecosystem to support an immediate transition to working from home, digital education and, increasingly, digital medicine. Network topographies have been transformed from office-centric to residence-centric. Demand for fixed and mobile data is surging, yet demand has shifted from downtown to suburbs and villages. And the macro context is uncertain: MNO profitability, already under pressure, may be stretched to breaking point, while a looming global recession may alter the landscape of industrial demand.
In this first article of a series of interviews and podcasts exploring the impact of covid-19 on digital infrastructure, TowerXchange explore the impact on towerco valuations and ask three leading analysts: is investment in towercos a relatively safe haven for capital amid the turmoil created by the pandemic?
Is the towerco business model ‘recession proof’?
“We don’t want to go as far to say that the tower business model is ‘recession proof’; but from what we can tell, towercos are pretty much as close as one can get,” said Spencer Kurn, Partner at New Street Research.
Nick Del Deo, Senior Analyst at MoffettNathanson added “No business is bulletproof, but tower leasing is clearly a far more resilient business model than most during times of economic stress. Towercos benefit from the fact that they provide critical infrastructure without which wireless operators can’t survive, they consume a fairly modest share of carrier opex, and are underpinned by long-term contracts. A carrier looking to trim costs may be able to address other line items, but can’t realistically change its tower lease expenses. Alternatively, one could conceptualise tower leasing as a form of super senior secured lending.”
“Towers are extremely resilient during economic downturns,” added New Street’s Kurn. “While many companies face declining growth, towers will undeniably grow due to the escalators embedded in their contracts with carriers, even if all other activity on towers grinds to halt.”
Can we forecast the impact of the Coronoavirus on demand from MNOs?
It’s early days, but Jonathan Atkin, Managing Director at RBC Capital Markets says: “we note from our discussions with a national wireless carrier this past week that there is very limited impact at present as mobile services are considered critical infrastructure, and the carrier continues to add capacity and coverage to the network.”
“In reality, wireless infrastructure is so vital to consumers that we don’t expect carrier investment to slow,” added Spencer Kurn. “In fact, the U.S. carriers are already doing the opposite during the Coronavirus epidemic by increasing capex to support anticipate higher levels of data consumption.”
American Tower, Crown Castle and SBA Communications share price compared to S&P 500, Q120
A closer look at the U.S. tower market, where much of the tower industry’s aggregate value resides
“The impact of covid-19 events on U.S. macro towercos appears minimal, based on our views of a robust wave of leasing that will accompany the T-Mobile/Sprint integration, Verizon’s CBRS overlay, and the prospective mobile 5G/C-band overlays by AT&T and Verizon,” said RBC Capital Markets’ Jonathan Atkin. “These investments are table stakes for meeting mobile data demand, and unlikely to abate, in our view.”
“Looking farther out, we believe tower growth will remain strong over the next three years, even in the event of a recession,” added New Street’s Spencer Kurn. “Most of the growth we expect will come from New T-Mobile building their new network and Dish entering the wireless market. In T-Mobile’s case, they need to deploy Sprint’s spectrum to their network so they can first migrate Sprint’s subscribers and then shut down Sprint’s network to capture US$55bn in synergies. This project will deliver the highest returns of opportunities they face, so we doubt they would delay this spend. In Dish’s case, they have committed to the FCC to cover 70% of the population with 15,000 towers by mid-2023; we expect them to make good on their commitments.”
MoffettNathanson’s Nick Del Deo adds some cautionary remarks regarding Dish. “Dish Network is expected to be a boon to U.S. towers in the coming years, but its financial situation is increasingly tenuous and its ability to fund its project on reasonable terms directly ties to the probability it can deploy a robust network over a reasonable timeframe. Dish’s market cap has collapsed to nearlyUS$10bn and the market rate of interest on its benchmark bonds has risen roughly 400 basis points over the past month.”
Where else does to Coronavirus pandemic, and the associated downturn, create risk for the tower industry?
“New leasing activity is clearly tied to the health of the customer base, and that’s where any economic stress is most likely to be evident,” adds MoffettNathanson’s Nick Del Deo. “Carriers can defer network projects to augment near-term cash flow, which may happen as a consequence of non-wireless operations and/or financing costs, and that can translate to lower tower growth. For example, AT&T’s WarnerMedia and Business Wireline segments are both quite cyclical, while its video distribution business is likely to see its rate of decline accelerate, which will put pressure on the company as a whole to conserve cash in light of its heightened leverage and dividend commitment.”
“In times of uncertainty like these, investors should seek refuge in towers, knowing that they will grow through a recession and that the long-term growth potential will be largely unaffected.”
Nick Del Deo continues: “the coming downturn will likely highlight the lack of meaningful strategic logic behind business model diversification. Some investors like the idea of creating broad portfolios of communications infrastructure assets (towers, fibre, data centres). There’s little, if any, value to actually combining them under one roof, and one might argue there may be dis-synergies to the extent an operator can be pressured to discount rates to win new business in another vertical (for example, ‘give me a discount on my tower rent and I’ll give you some small cell business’). Fibre, in particular, is a much more cyclical business and wireline commercial services revenue will suffer during a downturn. Data centers will be less affected operationally, but their capital needs expose the owners to funding risk. A recession is likely to illustrate that business model diversification isn’t what it was cracked up to be, and not all communications infrastructure business models are created equal,” concludes Del Deo.
“There are a couple of risks to our forecast from the Coronavirus, which are hard to quantify,” adds New Street Research’s Spencer Kurn. “If the Coronavirus impairs carriers’ ability to get equipment, or the ability of tower crews to go to work, the installation of equipment on towers could be delayed. We haven’t detected either of these risks in our checks with companies yet so we aren’t including them in our models. In the worst case, growth could be modestly slower than expected in 2020, but it would likely rebound faster once the virus passes, resulting in little change to our multi-year expectations.”
Spencer Kurn, Partner at New Street Research concludes: “The tower business model is one of stable, predictable, and compounding cash flow. In times of uncertainty like these, investors should seek refuge in towers, knowing that they will grow through a recession and that the long-term growth potential will be largely unaffected.”
MoffettNathanson Senior Analyst Nick Del Deo adds “wireless has morphed into a vital utility that is somewhat insulated from economic ups and downs, further insulating tower operators from economic swings.”
Jonathan Atkin, Managing Director at RBC Capital Markets sums up by saying: “when viewed in the context of earlier economic disruptions (including in 2008), our observation is that tower operations see the least, if any, operational impact. From a financial/investment perspective, they undergo comparatively less multiple compression versus other sectors, and are amongst the first to see their multiples rebounds during a recovery.”