U.S. Cellular today announced its Q4 2020 earnings, and within their disclosures, provided an update on their 4.3k owned towers portfolio, which makes them the fifth largest owner of towers in the United States. Given the increasing investor interest, and valuations for precedent towers M&A transactions, the company’s towers portfolio is garnering significant attention.
Unlike Verizon, AT&T, and T-Mobile, which have all monetized their towers over the past years through sale-leaseback transactions, U.S. Cellular still owns its tower assets. Indeed, the scarcity of U.S. Cellular’s towers portfolio makes it a strategic asset to own. Particularly, since the company’s share price does not reflect the intrinsic value of its owned towers portfolio, which alone commands a $4.5bn+ enterprise value.
Towers Portfolio Overview – U.S. Cellular
As of December 31, 2020, U.S. Cellular had 4.3k owned towers, which represent 63% of the company’s 6.8k total cell sites in service. On these towers, U.S. Cellular has 1.9k colocation tenants, equating to a tenancy ratio of 1.44x. Indeed, U.S. Cellular has a much lower tenancy ratio than the U.S. tower assets of the independent tower companies. Specifically, tower company tenancy ratios are 2.6x at American Tower, 2.1x at Crown Castle, and 2.1x at SBA Communications.
Overall, U.S. Cellular’s tower tenancy ratio shows that the company has significant future lease-up potential of its it owned tower assets. By growing the number of third-party tenancies on its towers, the company could bring its tenancy ratio from 1.44x to be closer to 2.0x, over the long-term.
Financial Metrics – U.S. Cellular Towers Portfolio
Importantly, U.S. Cellular’s third-party tower rental revenue is distinct from any implicit revenue that the company would pay for the use of its owned towers, on an intercompany basis.
Tower Rental Revenue – Third-Party Tenants
For Q4 2020, U.S. Cellular generated tower rental revenue, from third-party tenants, of $19.7m, growing 8.8% year-over-year. Therefore, on an annualized basis, the company’s third-party tenants produce $78.8m of tower rental revenue per year. Indeed, these figures imply colocation rates per site of $3.5k per month, based on U.S. Cellular’s 1.9k colocation tenants.
As a benchmark, tower companies like American Tower, Crown Castle, and SBA Communications command colocation rates per site of $2.5k to $3.5k per month. Therefore, U.S. Cellular colocation rates per site, per month, for third-party tenants are in-line with these independent tower companies.
Tower Rental Revenue (Implied) – U.S. Cellular Tenancy
U.S. Cellular is itself the anchor tenant on its 4.3k owned towers portfolio. Therefore, certain assumptions need to be made to approximate the implicit tower rental revenue that U.S. Cellular would pay. This scenario examines a sale-leaseback of U.S. Cellular’s 4.3k owned towers portfolio, with the company being the anchor tenant.
Assuming colocation rates per site of $3.0k per month, the implied tower rental revenue payment by U.S. Cellular would be $153.8m per year.
Tower Rental Revenue – Total Towers Portfolio
Overall, the total tower rental revenue generated by U.S. Cellular’s owned towers portfolio would equate to $232.6m per year. Specifically, this is comprised of $78.8m per year from third-party tenants and $153.8m per year paid by U.S. Cellular.
Tower Cash Flow – Total Towers Portfolio
Finally, U.S. tower companies typically operate with margins of 60% to 70%. Indeed, tower companies incur operating expenses such as ground rent, utilities, and fuel costs. Therefore, it is conservative to assume the mid-point, being a 65% tower cash flow margin. In turn, U.S. Cellular’s owned towers portfolio would generate $151.2m of tower cash flow per year.
Valuation Metrics – U.S. Cellular Towers Portfolio
We base our analysis on recent tower company M&A transactions in the United States and trading multiples for American Tower, Crown Castle, and SBA Communications. As an example, in November 2020, American Tower paid $3.5bn, equivalent to 30.4x tower cash flow, for InSite Wireless.
Overall, it is conservative to assume a 30x tower cash flow multiple on the $151.2m of tower cash flow, which U.S. Cellular’s tower assets generate. Therefore, a sale-leaseback of U.S. Cellular’s 4.3k owned towers portfolio, results in an enterprise value of $4.5bn for the tower company. Indeed, this equates to an enterprise value per tower, on the 4.3k tower sites of $1.1m per tower.
In comparison, U.S. Cellular’s current enterprise value is only ~$4bn, based on its current share price and debt levels. Therefore, the implicit value of U.S. Cellular’s towers makes them more valuable than the entire company’s market valuation, including debt.
Ownership and Strategy – U.S. Cellular
U.S. Cellular is controlled by Telephone And Data Systems (NYSE: TDS), which owns 82% of the company’s common stock and controls 96% of the voting power. Ultimately, Telephone And Data Systems is still under the control of the Carlson family, who founded the company in 1969.
Why Does U.S. Cellular Continue Owning its Towers?
In recent public statements, U.S. Cellular’s management has made it clear that its current plan is to retain full ownership of its towers. Specifically, Laurent Therivel, U.S. Cellular’s Chief Executive Officer, identifies some of the company’s rationale behind this decision.
Firstly, 5G network upgrades will require U.S. Cellular to make frequent amendments to its tower sites. These amendments include adding new 5G antennas and radios to its towers. By owning its towers throughout the 5G upgrade cycle, U.S. Cellular is eliminating the need to pay amendment fees. This is because amendment fees are charged by independent tower companies, for these type of network upgrades. In turn, U.S. Cellular reaps significant savings from an operating expense perspective.
Secondly, with the towers under U.S. Cellular’s ownership, the company does not have to pay contractual rental escalators. Indeed, these rental escalators are typically 3% to 4% annually in the United States, when leasing towers from independent tower companies.
Long-Term Considerations for Towers
Long-term, Laurent Therivel, acknowledges that U.S. Cellular is exploring ways to create shareholder value from its tower assets besides an outright sale. Specifically, this includes raising securitized debt on its towers portfolio, which would be at meaningfully lower cost of capital than the company’s current debt levels. Additionally, a spin-off of its tower assets into a separate public company is also a consideration. Indeed, tower spin-off and carve-out transactions are becoming increasingly common by many of the largest tower companies globally.