While ground lease costs remain the primary operating expense for tower networks in CALA, in most markets, lease costs are a pass through to the tenant. However, we have started to see some MNOs seeking to share lease costs with their towerco partners, while other towercos have sought to acquire the land under their most strategic towers to increase security – particularly against the growing threat of ground lease aggregators.
Ground lease aggregators in CALA
Ground lease aggregators seek to acquire the land under the most profitable cell towers, typically by offering the landlord a lump sum buyout. It can be a painstakingly slow process, literally going door to door, landlord to landlord, rolling up real estate. On balance sheets, aggregating land leases looks similar to the towerco business model itself: long term recurring revenues from credit-worthy tenants. Furthermore, the aggregation and sale of large portfolios of land leases to towercos represents an obvious potential exit. However the practice can erode margins for towercos and create animosity in landlord-carrier relationships.
Some of the largest ground lease aggregators in the U.S. have explored opportunities in CALA, including AP Wireless, TowerPoint Capital and Unison Site Management.
Towercos themselves are also acquiring the land under some of their towers, despite lease costs often being a pass through: “I try to secure the land under my towers to give the carrier more security,” said one participant.
The ground lease aggregation business in CALA is immature and varies from market to market. Land aggregators like Gryps and AP Wireless have been relatively active in Brazil. “One ground lease aggregator has been sending out teams to knock on doors, another has placed an ad in the paper enticing land owners to call,” observed one round table participant.
While in Brazil there are such problems with lease registration such that it’s not always possible to tell who the landlord is, on the other hand some landlords have reportedly struggled to know who to call about telecom structures on their land, and frustrated landlords are more inclined to sell out to lease aggregators.
“Land aggregation isn’t as easy outside Brazil,” said one participant. “In Brazil you can’t buy real estate at a good price once a tower is on the site – valuations can increase six times!”
While the lease aggregation model has been applied to Brazil, in contrast Mexican real estate law reportedly is less favorable for ground lease aggregators. This is because stakeholders – potentially including the tenant – have to approve the transition of ownership, which limits growth opportunities for aggregators in Mexico. There has been some limited ground lease aggregation activity in Mexico, but not on the same scale as Brazil.
Reported sightings of ground lease aggregators in CALA
Similarly, if you record your interest in the ground lease in Colombia, any lease aggregator has to respect your company. However it is a complicated process to register interest, and you need landlord co-operation. Where towercos are inheriting sites from carriers, they inherit a complex ball of problems, which can risk leaving the portfolio exposed to ground lease aggregation for a window of time. Again there are a handful of ground lease aggregators in Colombia, but their impact to date has been minimal.
“We haven’t seen much activity from land aggregators in Peru – none of the recognised companies, only a few individuals looking at this,” said one participant.
“We’ve seen some land aggregation in Chile,” said another participant, “but it’s complex to get a new site: it can take six to eight months to get permits. With community and camouflage obligations, there are significant barriers for entry.”
“While in Mexico the towerco I worked for had AP Wireless buying the land under our towers, setting their own terms and working against us, which became an acrimonious relationship. In the U.S. there can also be an acrimonious relationship between towerco and ground lease aggregators, although there have been some instances of ‘friendly’ ground lease aggregators with which the towercos have been able to create a co-operative relationship,” added another round table participant.
In general it was felt that the ground lease aggregation business was significantly less mature in CALA than in North America – crucially no round table participants had yet encountered ground lease aggregators hiking up lease rates and asking for payments
In general it was felt that the ground lease aggregation business was significantly less mature in CALA than in North America – crucially no round table participants had yet encountered ground lease aggregators hiking up lease rates and asking for payments, which was the point at which the practice really started to affect the U.S. tower market.
Whose balance sheet is at risk from ground lease aggregators? With lease costs still a pass through in Brazil and Mexico, and shared between however many tenants are on the site, carriers are exposed to this risk. But if the MNO negotiates a robust contract with limitations on ground lease price increases, or seeks to share the cost of the ground lease with their towerco partner, towercos cease to be insulated from this risk.
Heatmap of ground lease aggregation activity and opportunity
Buying the land under your own towers
“We look at it as investing in our own assets – it’s more secure to buy land under my own assets,” said one participant. “Value is derived from the lease term, cash flow, tenancy ratio, attractiveness of location; investing in the land under our assets means increasing cash flow and reducing expenses.”
“The difference when towercos do this compared to land aggregators is that we’re not motivated to ratchet up prices,” said one towerco. “We’re happy for towercos to be the landlord,” added an operator.
“If you can’t buy the land, will you pre-pay and extend the lease?” Asked one participant.
“In some markets there is a limitation – it depends if we want to add opex or spend capex,” replied one participant. “In the U.S. there was a tax shield from pre-payment of the lease, so if you bought the land you couldn’t depreciate it,” added another.
“Towercos can’t buy all the land under the towers; a significant proportion of landlords aren’t interested. It becomes a question of whether to allocate the resource to land aggregation, or do I just let a land aggregator do it?” Concluded another participant.
Dealing with landlords
It is always important to do the due diligence to ensure you’re paying the real landlord, and if towercos and MNOs can register their interest in the land it can increase valuation – so it is important to look at towers one by one.
It is important to have a right of first refusal (ROFR) on the acquisition of the land in your contract, but even if your landlord sells to a land lease aggregator, are you going pick a legal fight with a rural landlord?
Access to capital for land acquisition
“We acquire as much land under our towers as we can find willing sellers – we don’t set a maximum, although we prioritise higher cash flow sites – as long as we’re meeting our hurdle rate, the CFO will be happy,” said one towerco.
“In the absence of amazing M&A opportunities in CALA, we have cash so it’s a great to deploy capital on own assets. We don’t like land aggregators because they reduce our ability to deploy capital,” added another participant.
“We started to prioritise sites based on revenue, initially as a protective measure against what happened in U.S. The sweet spot for land aggregators might be suburban, secondary cities as in many cases it might not be able to buy land under first city sites. Our strategy extended beyond buying land – we also extended leases,” added a third participant.
Conclusions
Some CALA markets are attractive for land aggregators, others less so. If it’s too easy to relocate a tower, or if the towwerco and/or tenant can register their interest in the site, the land aggregator is disempowered. Savvy land aggregators target specific high value sites; not every site in your portfolio is at risk, but towercos would be well advised to protect the land under their highest value sites. Ground lease aggregators will convert any minor default in your contract into a sustainable position, so it’s essential to have a well drafted contract with a decent ROFR.
A small disclaimer to this article: TowerXchange are tower industry analysts – ground lease aggregation is a parallel industry which we touch on, but don’t study in as much detail. Therefore, we don’t have the usual volume of contextual information around this article and, as such, you should treat the content of this piece as a partial snapshot based on the opinions and experiences of a dozen telecom real estate stakeholders at the recent TowerXchange Meetup Americas.
Site aggregation model
One company participating in the round table operates an extensive site aggregation model in Brazil – a different approach from ground lease aggregation whereby the rights are secured to a portfolio of potential telecom sites.
“We go after big companies with vast real estate: banks, drugstores and other retailers. We have signed 120 contracts securing the rights for interested operators to deploy infrastructure on 22,000 sites, shortcutting the site acquisition process,” said the site aggregator.
“We see a significant opportunity in small cells – 65% of our properties are in urban areas, on which over 40 small cells are already located. It’s not as capex-intensive a business as the US$100,000 plus it costs to build a macro tower. We lease from the landowner and when there’s demand from the operator, we have the right to sublease. Leasing land to the telecom industry isn’t our clients’ core business and it’s not their priority; our proposition represents additional revenue without any cost to them. If the operator wants a tower, we build it and we own it; it’s like a build to suit done the opposite way – from ground up!”
