American Tower’s holistic master lease agreement (MLA) with Verizon expired as of December 31, 2021, shifting the tower company’s relationship with the wireless carrier to an à la carte pricing model, for new deployments from 2022 onwards, unless/until a new MLA can be agreed between the two parties. Notably, Verizon’s existing site lease agreements remain in-place with American Tower for the remainder of their contract, which have a duration of ~5 years until expiration.
Importantly, Verizon is one of American Tower’s top 3 tenants, contributing 12% of American Tower’s property revenue globally as of Q3 2021. Indeed, this implies a commitment of ~$1.1bn of property revenue on an annualized basis.
Holistic Master Lease Agreements (MLAs) – Background
Holistic master lease agreements (MLAs) provide tower companies, like American Tower, with recurring, long-term revenue growth, and a reduction in churn (i.e., historically less than 2% for American Tower in the United States). At the same time, strong credit tenants like Verizon, which holds investment grade ratings, add to the security of American Tower’s income stream.
Overall, these characteristics of holistic MLAs help justify the strong valuations placed on the long-term cash flows of tower companies – in American Tower’s case, ~25x EBITDA and ~26x AFFO for 2021.
Typically, these holistic MLAs include:
- Built-in annual escalators, which was ~3% for American Tower and Verizon’s MLA
- Fixed annual charges which permit Verizon to place a pre-determined amount of equipment on American Tower’s sites
- Incremental lease payments for exceeding pre-determined equipment levels
Verizon and American Tower – À La Carte Pricing Model
From 2022 onwards, Verizon’s network deployment activities on American Tower’s infrastructure, such as radios and antennas for C-band spectrum (see below), will be governed by an à la carte pricing model.
Use Right Fee
As part of American Tower’s holistic MLA, Verizon paid a “use right fee”, for incremental amendment activity (i.e., to install new antennas and radios), in addition to the contractual ~3% escalator. With the expiration of this holistic MLA, the use right fee is no longer applicable under an à la carte pricing model. Importantly, this use right fee was paid at the beginning of each calendar year, supporting American Tower’s organic tenant billings growth during the first part of the year.
Organic Tenant Billings Growth
American Tower’s projections (as of Q3 2021) imply U.S. & Canada organic tenant billings growth, for full-year 2022, of only ~1% – which includes Verizon’s à la carte pricing. Indeed, this figure is significantly lower than American Tower’s forecasted U.S. & Canada organic tenant billings growth of ~3% for 2021.
Combining American Tower’s lack of use right fee from Verizon at the beginning of 2022, with a subdued ~1% U.S. growth rate envisioned for full-year 2022, implies that the company’s U.S. organic tenant billings growth in the first-half of 2022 could be 0%, or even negative.
C-band Deployments – Verizon
During 2021, Verizon’s MLA structure economically incentivized the company to deploy C-band equipment on American Tower’s sites. This is because higher à la carte amendment pricing now applies to Verizon’s C-band deployments in 2022. Thus, a ‘pull forward’ of C-band deployments may have occurred between Verizon and American Tower in 2021.
As of the end of January 2022, Verizon covered 95+ million points-of-presence (PoPs) with C-band in the U.S. Still, the wireless carrier has aggressive deployment plans over the next two years. Specifically, by 2023, Verizon projects it will reach 175 million PoPs with C-band.
Overall, it will be important to track Verizon’s future C-band deployment levels with American Tower under an à la carte relationship. Given Verizon’s public commitments to C-band deployments, any reduction in activity with American Tower would be directly beneficial to Crown Castle, SBA Communications, or private tower companies like Vertical Bridge.
