Towers are the “best business ever,” according to Alex Gellman, CEO and Co-founder of Vertical Bridge, a DigitalBridge Group (NYSE: DBRG) portfolio company. Gellman shared his perspectives on the state of the tower business in a keynote presentation at the Maryland DC Wireless Association gathering last week in Baltimore. Gellman cautioned, however, that the industry is being adversely affected by high interest rates. It was exactly a year ago, he pointed out, that the Federal Reserve raised interest rates for the first time. In the past year, interest rates have increased 4.5 percent and are expected to inch up to over 5 percent by the end of 2023, before gradually retreating by 2026. There is, however, a lag effect, according to Gellman, and the real impact of higher interest rates may not be realized for months.
Gellman says the problem is that high interest rates drive up operating costs and limit network operators’ ability to borrow money needed for network operations and new network construction. With interest on loans up two- or three-times prior levels, those carrying costs are eating into cash flow and affecting debt coverage ratios, and ultimately, borrowing power. Even with this “new normal” environment, broadband connectivity and mobility remain important drivers for social and economic growth. Vertical Bridge’s main customers, the Big 3 mobile network operators, are still under pressure to build out their national networks even though Gellman expects MNO capital expenditures to be “muted” in 2023 compared to 2022.
Public tower company stock prices have declined 30 percent over the past 12 months. Gellman calculates that for every one percent increase in interest rates there is a 2X negative effect on cash flow and overall stock values decrease. Among private tower companies, tower cash flow multiples have not come down and are still high compared to multiples on public towers. So there is a scarcity of towers for acquisition and potential acquirers have “dry powder” to deploy. “We may see private assets start to sell in the second half of 2023,” Gellman opined. “The question is ‘How deep is the valley?’”
The real challenge for towercos like Vertical Bridge in 2023 is to continue lease ups, in both renewals and new colocations, and cash flow growth. Gellman says that anticipating MNO moves on a quarter-to-quarter basis is not possible. “It changes all the time.” But the MNOs are under increasing pressure to build out their networks. Mobile data demand is not letting up. “Spending may be delayed but it is not going away,” he emphasized.
In his opinion, stable assets and cash flow make the tower business highly attractive. Gellman points out that the U.S. is the best tower market in the world. Foreign investor capital will come to the U.S. since it is still the best place to put investment money. Banks and private equity firms are investing in the U.S. That provides staying power for tower companies like Vertical Bridge that can take advantage of available capital while waiting out its MNO customers that must spend, “now or later.”
By John Celentano, Inside Towers Business Editor
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