TriStar: Building a towerco from the ground up

Matt Newton has been part of the telecom industry for 20 years, initially with Columbia Capital and more recently as Vice Chairman of TriStar Investors. As a Partner with Columbia Capital, Matt focused on wireless infrastructure investments, backing companies such as Extenet Systems as well as Jim Eisenstein’s Optasite. In 2005, Matt led Columbia Capital to provide startup capital to David Ivy, the former Vice Chairman of Crown Castle.  David Ivy is the Founder and CEO of TriStar Investors, a new towerco with an innovative model that targets the real estate under the highest value third-party towers. Three years ago, David asked Matt to take an operational role, and he’s now a fulltime member of the TriStar team.

TowerXchange: Please introduce TriStar Investors and the role you play in the telecom tower industry.

TriStar is a US-based tower operator. We are also the leading aggregator of land and property rights beneath existing third-party towers throughout the US. TriStar is a nine-year old enterprise that was founded by wireless industry pioneers and has grown with the financial sponsorship of several leading private equity firms.

TriStar’s core strategy since our inception is to assist landowners in sharing in the increased value of their property. We also deliver solutions to our mobile operator customers that reduce their operating costs by providing them substantially lower rents than other tower operators. Our focus is solely on the highest value cell tower properties: those with the most tenants (typically three and four tenant towers). This is where our strategy has the greatest impact on landowner values as well as the highest cost saving potential for mobile operators.

When we launched in 2005, our business was a niche opportunity. Today, the acquisition of cell tower land and property rights represents one of the most fundamental business strategies in the tower industry. Every major tower company in the US is now using considerable financial and human capital resources to address the opportunity in cell site land acquisition. In hindsight, it’s hard to believe that the majority of the US tower industry sits on top of leased land with expiring ground leases.  But that is why there is such a great opportunity for TriStar.

More than 75% of the cell towers in the US have been consolidated by the major tower operators over the past 15 years. But less than 25% of the corresponding land has been consolidated. The next ten years could witness the consolidation of more than 100,000 land and rooftop sites. With a focus on superior wireless infrastructure assets, TriStar will continue to be the industry’s leader and it’s most innovative operator.

TowerXchange: What’s your role in the business Matt and can you give our readers a sense of the scale of TriStar?

We’re a team of 40 employees, so we all help out in a number of areas.  My primary responsibility is on financing, M&A and overall corporate strategy.

TriStar’s portfolio count is approaching 1,000 sites. Although this represents a small percentage of the estimated 135,000 towers in the US, our sites currently average four tenants per tower and are generally highly strategic locations and “carrier hub” sites.  TriStar only focuses on these types of premium assets.  Within the “premium infrastructure” segment we are the clear market leader and our scale is fairly significant.

TowerXchange: Does TriStar and the other lease aggregators actually operate tower networks, or focus solely on the acquisition of real estate beneath the towers?

This is what makes TriStar unique. While other lease aggregators focus solely on buying real estate and managing ground lease portfolios, TriStar has extensive experience as a tower owner and operator. By operating towers after the expiration of the existing ground lease, TriStar creates substantial additional value.

While other lease aggregators buy real estate under towers, TriStar is looking to build a tower operating business by starting with the land under the most valuable existing towers where the tower operator doesn’t own the real estate and doesn’t share much of the value with landowners. In this model, we’re able to deliver cost savings to carrier tenants and incremental cash flows to landowners, while still leaving a healthy margin for ourselves as the long-term tower operator.

TowerXchange: All sites are not created equal, so tell us about SmartSites™, TriStar’s data warehouse of cell site and landowner information, and give us a few hints about your proprietary scoring hierarchy.

SmartSites™ is the most advanced technical platform in our industry. We built it internally and it delivers a variety of capabilities across all aspects of our organization. Everyone at TriStar uses it every day. In particular, SmartSites™ provides invaluable data and analytics in the form of a scoring hierarchy for our site acquisition efforts.

When we consider a site for acquisition, it’s not just a question of how many tenants are on a tower, but also who they are. Tenant quality is critical.  Equally important is that we have done our own engineering assessments of the core transport networks, so we understand how the carriers have networked signalling and how this impacts the location-based nature of a tower asset. It also allows us to assess the future potential for site leaseup as well as network consolidation.

We also track the remaining duration of the underlying lease, as sites where the lease has the shortest remaining term have the greatest interest to us. It takes time to wait for ground leases to expire – we have a long duration business model!  Finally, we pay strict attention to local and regional zoning to understand the likely permanence of a location. It’s the location, not the tower, that provides most of the value.

TriStar has conducted physical site surveys of more than 50,000 towers, including the majority of all multi-tenant towers in the US.  All of this information is stored in SmartSites™.  Access to this data and the analytics we derive from it creates enormous operating leverage for TriStar.  As the universe of target sites expands over the next few years, we feel we have all the tools necessary to remain a leader in site acquisition and to do so in the most cost-efficient manner in the industry.

TowerXchange: It strikes me that the owners of ground leases under towers must be a highly fragmented segment of the industry - how do you go about achieving scale?

It is an incredibly fragmented industry segment – most landowners own just a single site. This creates limitations in how quickly scale can be achieved. However, it also provides sizable advantages for those that have already achieved scale, like TriStar.

TowerXchange: Take us into your office and explain how TriStar engages with a new land owner.

All our contacts are initiated in-house. No landowner dialogue is outsourced. We contact landowners by letter and phone, but it usually culminates with a face to face meeting over the kitchen table to explain how TriStar differs from our competitors, and to discuss the variety of different financial options available to the land owner. Again, it’s a time consuming process – while closing a deal with a land owner can be done in two months or less, often it can take several years.

TowerXchange: Do investors see ground lease aggregators as an bankable proposition? And what is your strategy to provide investors with an exit to realise RoI?

Absolutely. Investors are attracted to the wireless industry’s incredible growth story: mobile data traffic and the proliferation of mobile devices, coupled with highly predictable cash flows and a customer base of mostly investment-grade counterparties. It is viewed as fundamentally a real estate thesis with enhanced growth potential.

Our industry segment was largely passed over by major investors for some time. That is not true anymore. The past two years has seen the arrival of very sophisticated private equity capital, including the Blackstone Group, KKR, and several other PE firms. The investments they have made in land aggregation validate the asset class. A more competitive field should also push valuations higher and the capital injection is likely to accelerate consolidation and stimulate the towercos to move faster.

As far as exit potential, in the US there is a very fluid secondary market for land portfolio sales.  There has been more than US$2bn in aggregate transaction value over the past two years. There have also been over 300 tower industry transactions in the US over the last decade, so it’s reasonable to expect the most likely exit for our investors would be a strategic sale or equity refinancing. An IPO is also something investors may find attractive as the public markets have been successful avenues of value creation in our industry. TriStar has examined the option to convert into a REIT at some point in the future. If we were to have an IPO it is likely we would convert to a REIT prior to the financing.

TowerXchange: Do you see an opportunity for the ground lease aggregation model to be extended to emerging markets? What characteristics of land ownership and real estate law are required for your business model to work?

Yes. In fact we are aware of several companies already acquiring land assets in Central and South America, South Africa, and several European countries. This is something TriStar is considering, although we haven’t yet found a market that presents as good an opportunity for ground lease acquisition as the US market.

The requirements as we assess international market entry entail the following:

• A favorable legal system with regard to property rights

• Multiple wireless operators (preferably three or more) with adequate spectrum and infrastructure resources

• Favorable regulatory frameworks

• The appropriate political, economic, and  currency environment

TowerXchange: Please breakdown what “favorable legal systems with regard to property rights” consists of.

Our first question is “can foreign companies own the land under towers?” We then look at the underlying real estate law, and the mix of public versus private land ownership. Where the underlying land ownership is opaque, it doesn’t provide a great framework for our business model, so we have less appetite for such emerging economies.

TowerXchange: What’s your personal view of the evolution of the independent towerco business in emerging markets?

I haven’t looked at emerging market towers for a few years. When I last looked, it struck me that at some point there’d be a bifurcation of quality versus non-quality assets – that you’d see a lot of towers in emerging markets providing minimal use. There were many assets constructed without co-location in mind.  I also think network sharing could be a real dynamic that operators seek to leverage in certain markets. However, the mobile economies in emerging markets are clearly growing at a rate that is an order of magnitude higher than the US. For markets with robust economies and multiple wireless operators, the tower business looks like it did in the US many years ago.

TowerXchange: Finally, do you forsee opportunities for the diversification of the land lease aggregation business model?

A number of the other land lease aggregators are expanding their business into billboards, wind farms and other passive infrastructure. They are primarily finance platforms that will acquire any infrastructure with proven cash flows. TriStar is not likely to pursue these opportunities. We will continue our focus on acquiring land and operating towers as ground leases expire.