The drivers of SBA Communications’ expansion into Central and South America

Kurt Bagwell joined SBA Communications 2001 and since then, his career has changed dramatically. After becoming COO of US Operations in 2002, he is now in charge of the company’s thriving international operations in Canada, Central and South America.

SBA Communications is a leading tower company established in 1989 and headquartered in Boca Raton in South Florida. In 2012, SBA accomplished its first successful Brazilian acquisition of 800 towers from VIVO, a Telefonica subsidiary and, in recent months, it announced the deal with Oi for an additional 2,113 Brazilian towers, which closed in late November, and an additional deal with Oi for 2,007 more sites, expected to close on or before March 31, 2014.  In addition, SBA purchased Redesul/Telcom Towers, a small build to suit firm with 250 towers in the Sao Paulo area, in September 2013.

In an exclusive interview with TowerXchange, Kurt shares an insight into the company’s Latin American expansion and his views on the future of the tower industry in Brazil and beyond.

TowerXchange: Please introduce us to SBA Communications, including your footprint in South and Central America.

SBA Communications is a publicly-traded company that has been active for 24 years and is currently a 1,100 employee organization with revenues over US$1 billion annually and over 20,000 sites in its portfolio. We have thousands of rooftops and managed towers in eight countries: United States of America, Canada, Nicaragua, Panama, El Salvador, Guatemala, Costa Rica, Brazil, US Virgin Islands and Puerto Rico.

We have local offices in each of the six countries we operate in Central and South America.

Our tower portfolio counts 2,000 towers in Central America and with the near term closing of our announced Oi deal we will be at over 5,100 sites in Brazil, so roughly 7,100 total in the region.

TowerXchange: For the benefit of TowerXchange’s readers who focus on other markets, please could you introduce us to the South and Central American tower market by comparing it to the North American tower market.

First and foremost the independent tower business in these countries is typically not as old as in the US.  In the US towercos really got going in the mid to late 1990s. In Latin America, while there may have been a small player or two in some markets who built sites, the business developed much later than the US. In the past five years it really took off, with carrier tower sales and multi site developers in almost every market. With a less mature business comes settling in and learning for both sides on many issues including pricing, service, new tower builds, equipment loads and technology migration. The main characteristics though of the business are generally the same ones: the concept of the carrier not owning all their assets is accepted. It’s all about each company focusing on their core strengths and outsourcing the infrastructure portion of the network to companies like SBA and others who focus on this specific skill-set.

TowerXchange: What are the key components of Tower Cash Flow in Latin America - for example, what is the balance of revenue from additional tenants versus amendment revenue from existing tenants? And are the significant opportunities to improve site efficiency and therefore site level profitability, again improving EBITDA?

In most markets new tenant leases still drive new incremental revenue, but that is starting to shift in some places that are advancing to 4G. In cases where a carrier tower portfolio is offloaded to an independent towerco there can often be pent up demand, especially in cases where the former infrastructure owner had volume limits like one-for-one swaps or caps in place to create equal trade. A towerco buys those towers, opens them up freely to the tenant universe, and often the initial lease-up for new tenancies is very strong for the first year or two.

Amendment revenue is happening as well, for additional equipment and/or larger equipment. Much of this depends on the frequency sets in the market.  A big part of what has driven high amendment volume in the US is due to the 700 MHz frequency used for most 4G.

If you use lower frequency, you will need a bigger antenna. Although some antennas do work with various frequencies, this does have an impact on performance. Carriers offering 4G won’t stop delivering 3G services. They are adding services, not swapping them. Therefore, we are now experiencing an overlay in terms of services offered. This development means more equipment added to existing towers, and new towers being constructed, hence more opportunities.

So the key for a tower operator is to have clear equipment right contracts with each of their customers - matching price and load - and then being very diligent about working together and applying incremental pricing as load increases due to spectrum and/or technology changes. There is also a lot more microwave in Latin America than in the US, and that is a factor to consider, given that microwave dishes represent a major load on any tower asset. So EBITDA will improve at existing sites from amendments, but it will vary by carrier and by country based on the maturity of the technologies and spectrum holdings.

TowerXchange: SBA Communications has recently contracted or closed to purchase over 4,000 towers from Oi and closed on 800 from Telefonica/Vivo in Brazil. What’s your view of the attractiveness of the Brazilian market and what’s your vision for SBA’s role in the market? Do you have an appetite for further acquisitions in the country?

Brazil is a massive marketplace, and one we feel is far less developed in terms of site density than the US. While the wireless carriers in Brazil have large, strong subscriber bases, the networks have much room for advancement on many fronts. Cell density needs to increase to handle capacities and to help optimize network performance. Moreover, the current higher frequency set being deployed for 4G LTE requires higher density for basic coverage, and there is still good old fashioned geographic coverage growth that each of the carriers needs to continue to fill in various areas.

In suburban and rural areas, there is still a lot of work to be done as well to ensure high quality coverage. Carriers are balancing their needs to invest in metropolitan areas with the requirements of the suburban and rural areas.

With a population near 200 million people, a geography larger than the mainland US, and a couple of the largest cities in the world such as São Paulo and Rio de Janeiro, in addition to special events like the 2014 World Cup and 2016 Summer Olympics headed their way, this market has a long runway of needs for the wireless infrastructure business, and we are glad we made the decision to go in this marketplace. As of now, 5,100 towers is good, but we are definitely interested in more. One of the core fundamentals of any tower company is scale - in any country you go into you have a certain level of fixed costs with personnel, offices, financial and legal support, etc. That base cost scales very well in the tower business, so after you make a decision to go into a country, you can achieve even greater efficiencies in the future as you grow the total size of the asset base.

SBA is one of two major, long term public players in the Brazilian market and we foresee our future being much larger and very bright in this country over the next 5 to 10 years.

TowerXchange: What is the progress toward Heterogeneous Networks in Brazil? Is SBA interested in opportunities in small cells?

The ratio between towers and small cells being used very much depends on the geography and density of the areas in question. We will see more small cells being used for hotspots in high density areas. Small cells will work as underlay of the existing macro-system in urban areas.

For example, in São Paulo there are various rooftop sites complementing the macro-system - the towers already in place. Antenna centerline mounting heights are getting lower in urban areas, and a variety of cell implementation forms will be used to support RF equipment - whether it is shorter towers, small poles, low rooftops, etc.

SBA is definitely looking at being active on the small cell side. However, our core business remains the acquisition and ownership of macro site tower portfolios.

TowerXchange: Brazil’s 700 MHz auction will take place sometimes in 2014. How will that change the landscape and dynamics of carriers/tower companies? And which impact is that going to have on companies like SBA Communications?

700 MHz brings with it some physical changes in terms of larger antenna sizes and less opportunities for the carrier to share existing infrastructure with current technologies and frequencies, which will continue to be broadcast by them for the next several years at a minimum. While the auctions will happen in 2014, there is still spectrum clearing to be done and the exact implementation will be farther out. We will work together with the carriers - our customers - to prepare for this, and the typical topics will include loading, pricing, tower modifications if needed, and priority geographies.

TowerXchange: Beside Brazil, SBA is very involved in Central America. Which countries are leading tower industry development in Central America? And what makes those countries more attractive than others?

In Central America we are very active in five of the seven countries.  We are in Panama, Costa Rica, Nicaragua, El Salvador and Guatemala. We are not in Honduras nor Belize due to recent carrier consolidation and size issues which would both prohibit scale and strong growth. We have been in some of these markets since 2009, four years now, and others since 2010 and 2011. We have almost 2,000 sites in the region, and we are active in all of our markets.  We built these markets by buying carrier towers and/or locally owned developer towers, and once we set up shop in each market we do our traditional three sets of activities, which is to build more towers in select locations, buy more towers that fit our financial and operational model, and lease up more spots, or co-locations, on our existing towers.

These markets range from having two to four broadband carriers each, and that is a big factor in the volume of activity on a daily basis.  In general these markets have more lenient zoning than the US, but it is increasing daily in each country, which over the long term is key for our business and makes our assets even more valuable.

Capital and operating costs are very reasonable in Central America, land costs are rising but still in a good zone, and the labor workforce is strong and efficient. We have experienced great success in Central America, we have five main offices and a regional hub and we are the dominant tower company in the region with large bases of tower sites and high levels of new activity in each market.  These markets are generally 2G/3G/3.5G markets, with 4G LTE still in the future.  Electric power availability is great in Central America, as are resources for tower steel and an experienced contractor base for all activities - site acquisition, engineering, construction and maintenance.  We are very happy we chose to concentrate in these markets and like our dominant position.

TowerXchange: Puerto Rico seems to have lots of co-location/sharing opportunities. How is SBA involved in the development of its tower market?

SBA has been involved in Puerto Rico and the US Virgin Islands market since 1998, when we started to develop sites for Sprint. We have over 100 towers in the market place and have been there a long time. The market is very mature and is more on the timeline of the US market, given the carrier base that exists there, and we actually run this as part of our US operations. It has been a strong co-location market, the zoning rules are tough, the terrain presents challenges, and the carrier networks have been strained from the high end growth of all services, especially in the San Juan metro area where the population is large and dense.

TowerXchange: How are regulators supporting the development of the tower industry in South and Central America? What more can be done to stimulate investment and accelerate value creation?

The regulators have been welcoming to the tower business in every country we are in and for all the right reasons.

They see the independent sharing of assets as a way to keep tower proliferation to a minimum. Generally, regulators welcome companies like ours who bring incremental capital to the equation so the carriers can spend on their network needs and less on the physical infrastructure, and the regulators like our process and procedure where we treat the infrastructure  like long term assets which they are, in terms of having the proper approvals from airspace to land-use. In many cases there are buildout requirements put on the carriers for rural areas that would not be economically feasible without a tower sharing company stepping up and taking the risk, so in that regard our business fits well with the regulators general goals of ubiquitous wireless service offerings to the entire geographic footprint.

We have not seen and do not expect to see any regulation of our business that would interfere with our basic business plans. In some countries the regulators have been more active than others in helping work with the federal, provincial and local governments to standardize land use approval for cell towers, as many jurisdictions have unclear or cumbersome rules on how to deal with approvals of cell towers, similar to the US market in the early 1990s. This issue has gotten much better in some countries but still has a way to go in others.

In Brazil the regulator is very strong with carrier buildout and performance standards, which in general is a major positive for our business as it forces constant investment in the networks, which we are in the middle of.

It is important to highlight that approximately two thirds of new towers in Latin America are being built by non-carriers, e.g. tower companies. Our model and Build to Suit (BTS) are becoming widely accepted in the region so tailor-made regulations will continue to be refined in the future.

TowerXchange: What is the balance of sale and leaseback versus build-to-suit (BTS) programmes in Latin America? 

Build to suit is strong in Latin America. There has also been a lot of sale-leaseback in Latin America, and once a carrier embraces sale-leaseback, they typically then opt for build to suit for most new sites, as they have made the internal decision to move out of the infrastructure ownership side of the equation.

Some carriers still prefer to own and operate their tower sites and limit co-location based on a perceived competitive advantage theory, but that is becoming the exception instead of the rule.  The demands on the carriers are so strong to become more efficient on all fronts that build to suit and sale-leaseback have been happening in a big way in every country, and with almost every carrier.

In terms of suppliers to our development business, I believe that the suppliers enjoy working with us just as much as they enjoy working with carriers. Towers are our core business and with 3/4 of new towers now being built by non-carriers, it is obvious that most of these infrastructure development vendors will deal directly with companies like ours  on those projects.

TowerXchange: Growth in the Latin American tower industry is accelerating and being labeled by some as the “new North America”. What are the major challenges that must be overcome to for the tower industry in South and Central America to deliver the kind of returns achieved in North America?

In my mind it is more about time and less about the challenges.  The challenges will be the same - deeper education and further experience between the local carriers on how to best operate within a towerco environment, the balance of pricing and loads, more decisions on sale-leaseback and their internal capital structures, more commitment to BTS and the related structure and pricing, and towerco service quality.

The business is inherently the same as in the US - you have carrier revenues (hopefully multi carrier revenues) on a tower, and then five basic operating costs - land rent, maintenance and repairs, utilities, property taxes and insurance.  Those are the five main cost of goods sold drivers in the US market and the Latin American market that define the gross profits of a tower company business.

As I said earlier, electric power supply is not a major part of this business challenge as much as it is in some emerging markets, especially Africa. That brings on an entire different facet to the business, but the issues just don’t exist with power in Latin America like they do in other places. Therefore, the model is roughly the same as in the US market, it’s just about the maturity of the marketplace and the continued development of the market. The movement has started in a big way, it is gaining speed, and the model  works, just as it has in other areas.

In terms of its maturity and growth, I predict that tenancy ratios will get closer to the US standards in the near future. Currently, the US tenancy ratio is roughly 2.0 and above whereas we see it at an average of approximately 1.5 in Latin America.

STOP PRESS… Kurt Bagwell adds extra colour on SBA Communications’ latest deal with Oi

TowerXchange: How do these new site compliment your existing portfolio in Brazil?

The latest Oi deal is pure Oi Wireless sites in some of the highest density population areas, with current high tenancy.  They fit into our existing 3100 site footprint extremely well.

TowerXchange: Cost per tower is a pretty crude measure of a tower transaction, but one cannot help but notice that this latest deal with Oi works out as US$321k per tower, whilst the previous deal works out at US$143k per tower. Does that give us an indication of the impact of the relatively high tenancy ratio (1.6 in the recent deal compared to 1.15 in the previous deal), or are there other significant differences between the portfolios?

Yes, this tenancy ratio does create the premium value, in addition to other metrics around carrier leaseback rate, guaranteed term length, etc.  Price per tower can be a deceiving metric given all of this.  It all comes down to the mix of these variables, in addition to the growth factor we assume on these assets.  We expect over time to see a mid-teens rate of return.

Kurt Bagwell will be speaking at the TowerXchange Meetup Americas at 11:30am on Wednesday 21 May during the Towerco keynote panel. The TowerXchange Meetup Americas will take place 20-22 May in Orlando, Florida, in co-location with PCIA Wireless Infrastructure Show.

Contact me at aneri@towerxchange.com for more information and to sign up for the Meetup.

Additional articles in our Brazil case study:

The Mott MacDonald Share Square for Brazil

Over 9,000 towers needed ahead of the Brazil World Cup

A legal perspective on the Lei das Antennas

Exclusive: How Brazil’s Ministry of Communications is encouraging tower industry growth

Investments will surge where people connect