The evolution of vertical real estate in Central America

Torrecom is an independent towerco active in Mexico, Guatemala and Nicaragua which has been able to successfully apply its expertise and experience in the CALA region thanks to its North American roots, veteran management and fluid approach to change.

In this exclusive interview, Torrecom’s CEO, Maria Scotti, shares her views on the current status and key characteristics of the towerco industry in Central America and Mexico, what it takes to create high performing local teams, and her views on future developments that might impact the towerco business model in the region.

TowerXchange: Please introduce yourself and your background

I began in the wireless industry in 1992, as Manager of Engineering with our National Paging Company Message Center Beepers. Due to our network needs we utilised tower and rooftop infrastructure. Although unusual at that time, we always allowed others to rent and utilise our infrastructure which was the beginning of Message Center Management, Inc. In 1995, we divested our paging business, closing the largest paging transaction in history, and continued our focus in all areas of the wireless world and continued to grow MCM as a towerco in the USA.

In 2009, we were approached with the idea to start operating an infrastructure firm in Latin America. We, along with our co-founder, Indigo Capital, LLC created Torrecom and successfully started operations in Central American in 2010 and in 2013 officially launched Mexico.

TowerXchange: Maria, please tell us about Torrecom’s operations in Guatemala, Nicaragua and Mexico. What are the key strategic elements of your operations in each country?

Torrecom’s primary focus is to develop and operate wireless infrastructure. That development pipeline is fed by carrier build to suit (BTS) projects and sale and leaseback opportunities in all countries where we fly our flag. We are interested in every aspect of wireless infrastructure space, not only towers but all vertical real estate including in-building solutions, small cell and DAS – any technology that will enable our carrier customers to build and enhance their networks and delivery of services.

TowerXchange: Which capabilities did Torrecom manage to transfer from its U.S. founding partner, MCM? To what extent have you been able to source local management expertise?

The independent towerco business model is still relatively new to the region. We are bringing to market a completely new function which requires specific skill-sets and our U.S. background definitely helps us. We started operating in the U.S. at the very beginning of the wireless infrastructure industry and experienced a similar initial phase with its challenges and uncertainties. Now, we are transferring our experience in dealing with permitting issues, working with our industry peers on initiating best practices and building long term carrier solutions.

We hired local professionals in both upper and mid-management functions. They provide a unique understanding of the local market and many have a carrier background, which is a plus. However, it is key to ensure our local teams understand the fundamentals of building, owning and operating our portfolio.

Carriers’ focus today and into the future will be on network enhancements, maximising spectrum utilisation and meeting consumer demands for robust wireless services. Working with Torrecom allows them to focus on their core business.

TowerXchange: Please share your take on the structure and the opportunities in the Central American tower market. What proportion of towers are operator captive versus independent towerco owned?

The Central American tower inventory is still predominantly owned by carriers and I would estimate they retain approximately 70% of them. The trend in the region to move the tower assets to solid tower owner/operators is upon us and moving quickly along. BTS is also on the rise. Our experience and resources complements well their need to use capex for carrier core business growth or any other needs that they may have which fits within our business plans.

TowerXchange: Are there a lot of small local towercos?

There are a few contractors who acquired small portfolios while working with carriers on the construction side as well as a handful of BTS companies with a larger inventory of assets in both Nicaragua and Guatemala. Although the size of the Central American towerco market is vibrant and growing it isn’t comparable to the scale of Mexico, let alone Brazil just based on sheer size of the countries.

TowerXchange: What’s the prevalent business model? Grass and steel? Tower+power? 

Today towercos are predominately focused on grass and steel and rarely get involved in single power source/sharing except in very specific cases. Remember tower sharing is new to the region. As the market develops I am sure that will come along as well. It is an area that has been more aggressive in taking advantage of other power sources such as solar. Many areas in the region include off-grid sites. We work with the carrier in developing solar-driven or alternative power solutions on a site by site basis.

TowerXchange: What kind of valuations do towers attract in Central America compared to North and South America?

Valuations not only vary from country to country but more importantly from deal to deal. It is difficult to see a consistency amongst valuations versus seeing more of a consistency of xmultiples. What is consistent is that tower cash flows are a main driver in the majority of transactions, you will see different values based on particular deal economics but multiples will begin to look more and more alike as the co-location demand rises, subscriber and data usage growth and demand also rises. This in turn forces more robust networks and infrastructure to host that equipment, et cetera.

If you look at the xmultiples over the past few years in Central and South America you can see the multiples have been on a reasonable rise due to the towerco model. There is still a lot of inventory available for purchase and much to be built in what is considered a young environment for this space. We are excited about the future and I think that the xmultiples will reflect that over the long term.

TowerXchange: Are BTS opportunities substantially outsourced or are operators still building their own?

Again the trend in the region is to move to a large extent to outsourcing BTS projects. Yet carriers are very particular about who they deal with. Gaining their confidence, showing stability and the ability to deliver is critical to gain and retain long term relationships. In-house projects by carriers do still exist but in general, putting capex to use in network development is becoming a critical factor in their decision making process. Less and less operators are comfortable investing in passive infrastructure in light of the growing financial expenditure required for their network demands and potential 4G LTE network rollouts. This is creating an ideal environment for independent towercos to offer alternative solutions such as infrastructure sharing and BTS. If we look at the capex of carriers who still own their towers, it tends to be quite robust but the trend nowadays is to cut tower budgets and shift investment to network deployment and equipment.

Highlighting again the similarity to the US carrier/towerco environment in the 90’s, the difference being the speed with which the change is taking place. In the late 90’s the thought of many of the wireless services we as consumers have today were only dreamed of. And it seemed that technology was chasing the consumer. With the adoption and growth of wireless use, today it is the consumer chasing technology. Due to the knowledge of consumers in all countries, including in this region, the services are truly available and exciting. It is forcing the regional carriers to develop, enhance and develop again all while offering these services at competitive prices. Consumers as well as regulators are imploring carriers to provided robust services. This is changing the Latin American telecom industry and carriers are adapting to the evolution of market demand, creating new possibilities for towercos.

TowerXchange: What is the investor appetite for opportunities in Central American towers?

Investors are generally much more open to Central America and its telecom industry than four to five years ago. The entire Latin American wireless space is very strong and evolving fast, and investors are increasingly attracted to it. Investments, in the form of both international equity and debt funding from in-country institutions, are increasing and the pool of investors is becoming deeper and more diverse. Money is definitely travelling faster than it used to; a very interesting change to witness.

TowerXchange: Can you achieve scale across Central America – to what extent can you consolidate operations and expertise, for example under a single NOC?

We are looking at consolidating certain operational areas and in reality, countries are so close to each other that we can move swiftly across the region.

In terms of achieving scale, yes it is achievable in Central America and the region. Of course what constitutes reaching scale may differ from one company to the next. For me a real win is the moment when adding additional tower assets through sale and leaseback or other requires a smaller investment in SG&A while keeping our services consistent. Along with our size providing an ability to be of even better service to our carrier customers. But as we grow, we insist on keeping our creative and entrepreneurial spirit, our ability to turn on a dime to react quickly to market demand, and keeping ourselves deeply in the know of the wireless carrier industry to stay in front and continue to meet our KPIs.

TowerXchange: Do you think that the Mexican market will open further to towercos in light of the reform to telecom regulation?

There is huge potential in Mexico, but there is still lots to be done. Mexico has the least robust service for a country of its size. The government has been focused on trying to engender more competitive services becoming available in the country and regulatory changes are underway. Although a complex country to operate, we are very excited to see what happens over the next few months to be a part of this very dynamic change and we have been and continue to be ready to offer our services to carriers nationwide.

TowerXchange: What does it mean to be a smaller and faster towerco working in countries where there are larger multinational towercos? What is your competitive differentiation?

Carriers simply don’t want their network to reside on infrastructure entirely owned by one towerco. It’s too risky to run their entire operations via one large entity, so it makes sense for them to diversify their pool of partners and sometimes select smaller, nimbler towercos.

Beside our size and goals, competition is very positive for all of us as it ensures we all keep very high standards of service and operate in the best possible way. The telecom network is very complex and requires ongoing investments and passive infrastructure is instrumental to its optimum functionality.

Ultimately, carriers drive BTS projects and select partners whose teams possess the expertise and commitment to fulfil their technical and financial expectations. So it makes sense for them to be able to choose among various options.

TowerXchange: Which changes do you expect to see in the regional towerco model over the course of the next few years?

There is lots of focus on Mexico and its evolution in light of the ongoing regulatory changes. Carriers now are required to contribute to the change and fulfil the coverage and capacity needs of the country. We are entering a very interesting phase where carriers need to invest in network deployment and offer high quality services throughout the countries in a consistent manner, in both rural and urban areas. As regulatory reform comes to fruition, this phase will not only be operationally challenging but also financially demanding.

The same can be said about Central America as a whole. The market is driven by the demands of both the population and regulators to achieve improved network services. For example, Guatemala has been growing tremendously over the past three years and is now host to a number of new companies. Nicaragua is following the same pattern and used to be a very different country a couple of years ago. It’s now a more inviting environment for foreign investors, international tourists and business ventures alike.