The anticipated C-band auction is set to kick off next week, and looking ahead MoffettNathanson thinks Crown Castle could be positioned to see the fruits of the new spectrum faster and at higher levels than its tower company peers.
In a Friday report to investors, MoffettNathanson analysts led by Nick Del Deo reconsidered the view overall for tower companies into 2021 and beyond, moderating their financial outlooks, as next year seems like it could be more of a table-setter for growth in 2022 and later.
That’s expected to be the case when it comes to C-band spectrum as well, with the firm anticipating more material revenue impact in 2022 and later than in the coming year.
The new mid-band spectrum is largely expected to be a good thing for tower companies, but American Tower might not be able to monetize whatever C-band spectrum Verizon ends up deploying as fully as others – and the same goes for Crown Castle in relation to AT&T, according to MoffettNathanson’s Del Deo.
At auction 107, starting December 8, the FCC will offer 280-megahertz of mid-band spectrum in the 3.7-3.98 GHz portion of the C-band.
While AT&T is expected to make a showing at the auction, it’s more financially constrained than others. Verizon, meanwhile, needs midband spectrum in its 5G portfolio and is widely expected to bet big, raising $12.5 billion in debt ahead of the auction.
“It remains unclear how this tension will be manifested at auction,” wrote Del Deo in the 46-page note to investors.
T-Mobile (who has a head start on mid-band with its arsenal of 2.5 GHz) has said it would take a “disciplined” approach to C-band.
MoffettNathanson thinks Crown Castle could have an advantage in seeing tower activity first, and possibly more of it, than American Tower and SBA because more of its infrastructure assets are located in urban areas.
“Carriers oftentimes view urban locations as ones where they can get more bang for their buck (subscribers per cell site) and hence initially prioritize them over more rural locations,” wrote Del Deo.
Separately, Crown Castle’s urban skew has also been viewed as one of the reasons it was the first to secure a long-term tower deal with Dish Network.
A second factor MoffettNathanson called out is C-band’s propagation characteristics, which it noted aren’t as good as the typical low- and mid-band spectrum carriers’ have usually used – meaning it doesn’t travel as far or penetrate as well.
This “could limit the number of towers on which it is economically viable, favoring towers in more densely populated markets,” wrote the team. Though they mentioned an alternate scenario where less reach instead could mean more cell site deployments, thus removing Crown Castle’s urban advantage.
Monetizing C-band deployments
Tower location aside, American Tower still might not be able to make as much money off its towers from Verizon’s C-band deployments compared to peers, according to Del Deo.
That’s because Verizon might already have unused capacity under an existing MLA. It also has rights stemming from American Tower’s 2015 acquisition of 11,500 towers from Verizon that gives the carrier 30,000 square inches of wind load surface area per site before it would have to pay incremental rent. The firm said those towers likely account for about 35% of Verizon’s sites with American Tower.
As for the 2017 MLA, MoffettNathanson believes it covered pricing for five years, with a 3% bonus escalator for planned equipment additions. But since then Verizon has been very focused on its millimeter wave strategy and therefore small cells, so not doing as much activity on the tower side as initially planned.
“This suggests that Verizon may be paying for capacity that it is not currently using, reducing what it might have to pay for a round of C-band amendments,” wrote Del Deo.
The firm acknowledged that it doesn’t know “if or how the MLA and the master lease associated with the portfolio acquisition interact with one another” or if the unused capacity under the 2017 MLA expires in 2022.
Still, those factors suggest “there is the risk American Tower won’t be able to monetize Verizon-driven C-band amendments to the same degree as its peers.”
Similarly, MoffettNathanson suggested Crown Castle might not get as much juice out of C-band deployments by AT&T as other tower companies, because of capacity rights related to its 2013 acquisition of 9,700 towers from AT&T. Related to that deal, AT&T was granted 27,000 square inches of wind load surface area before it has to pay incremental rent on each of those towers, according to the firm, though it doesn’t apply to Crown’s more than 30,000 other towers.
According to the firm, AT&T’s usual equipment deployments likely don’t surpass that capacity limit “meaning C-band augmentations may not incur incremental rent or may incur below-average incremental rents,” for Crown Castle, though added that “it’s hard to say and could vary on a site by site basis.”
The analysts expect C-band amendments will fall in a normal range of several hundred dollars per month per site.
MoffettNathanson doesn’t think there are any factors that could hurt SBA from monetizing any carrier’s C-band deployments fully.
There are still clearly a lot of questions around C-band, including how competitive and aggressive carriers will be and just how quickly the spectrum will be cleared and deployments start.
As Del Deo noted, incumbent satellite users are set to receive nearly $10 billion in incentive payments for meeting an accelerated clearing schedule. That includes the first 120 MHz tranche in 46 of the top 50 partial economic areas (PEAs) by December 2021, and the remaining by December 2023.
During third-quarter earnings, SBA CEO Jeff Stoops said it would be a while before SBA sees the highest level of activity it expects from C-band deployments but that the spectrum will be cleared faster than people expect.
“There is every incentive for the folks who win that spectrum…because they are purchasing it, in some cases, arguably to stay competitive with a rapidly deploying T-Mobile to get things done very quickly,” Stoops said on the November earnings call.