Our business is about as simple as it gets: we build towers and rent space on them for radio equipment, such as cellular antennas. Generally, our customers need long term use of our towers, which means they commit to at least 10 years of occupancy. Even without a contractual commitment, once they’re installed on our sites, our customers don’t leave, because our towers become an integral part of their networks; removing equipment would lead to a degradation of service.
Over the last two decades, the tower business has grown rapidly, both because of the expansion of wireless services and because tower companies can deploy large amounts of capital for long-term returns that are both stable and far exceed those of more traditional forms of commercial or industrial real estate.
In the largest third-party tower market, the US, the combined market capitalization of just three of the largest tower companies, American Tower, Crown Castle and SBA Communications, is approximately $100 billion or about 18 times Net Operating Income (NOI, or total annual income less ground rents paid to tower landlords, insurance and maintenance costs). In the low rate environment that has prevailed over the last decade, these companies have been particularly prized for their ability to generate substantial and rapidly growing tower cash flows.
Canada has lagged significantly behind the US and other industrialized markets, in the sense that the majority of tower assets continue to be controlled by the incumbent wireless carriers. Generally speaking, Canadian carriers have stuck more firmly to the thesis that towers are a strategic asset, and to give them up is to give up too much control of their wireless networks. The relative lack of competition in Canada also means fewer potential tenants for each tower.
We see the Canadian market changing, albeit slowly, not simply because of the diversion of capital from wireless to wireline (primarily fibre) investments by the carriers, but also as carriers recognize the significant op-ex burden imposed by owning and operating a large network of towers. In the mature market for wireless services, net new subscriber growth has slowed significantly, and the business has become about winning through customer experience and the portfolio of services offered to the customer.
In the context of this evolving market for wireless services, we think it makes more sense than ever before for wireless carriers to recognize that towers are not their core business, and that these assets can be more efficiently built, owned and managed elsewhere.