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Tower One Wireless Secures Blockbuster Deal To Build 150 Towers

|About: Tower One Wireless Corp. (TOWTF), Includes: AMT, CCI, SBAC
Summary

Tower One Wireless is a telecom construction provider in Mexico, Colombia & Argentina. They built & own 82 cellular (wireless) towers.

Tower One entered an important transaction. A private company, is loaning 100% of the capital required for Tower One to build 150 towers.

The Company recently sold 23 towers at 15x Tower Cash Flow, which is about 80%-85% of gross Tower revenue. Mgmt. says it's more like 85%-90%, but I'm being conservative.

Assuming the Tower Cash Flow margin = 82.5%, the existing tower portfolio is worth nearly 2x the market cap. But, the portfolio is growing.

It costs Tower One Wireless C$80K-C$90K to build a tower than can host up to 3 wireless carrier tenant's equipment. They can sell the towers for 2x-3x what it costs to build them. They sold 23 towers in Colombia for US$2.6M and paid US$900K to build them.

**Figures in C$ unless otherwise noted, tower valuations & financial metrics are estimates only**

In a past life, I was a corporate bond analyst. The Big 3 wireless tower leasing companies, American Tower[NYSE: AMT], Crown Castle [NYSE: CCI] & SBA Communications [NASDAQ: SBAC] were low-rated entities, even by junk bond standards.

Here’s a quote from Moody’s initial bond rating of Crown Castle in 1997,

Moody’s has assigned a B3 rating (low end of junk credit) to Crown Castle’s US$100M notes due 2007. The ratings reflect the high level of debt relative to near-term cash flow; revenue concentration with 2 customers; and the expectation of future acquisitions, which will likely maintain high debt leverage… “

Tower One Wireless, [CSE: TO] / [OTCQB: TOWTF] is a telecom infrastructure company with a market cap of $7.5M (as of April 8th, 93.4M shares outstanding, < 96M shares fully-diluted). This Company reminds me of Crown Castle 22 years ago. As of the end of March, Tower One had a total of 82 towers in Argentina, Colombia & Mexico. 18 had 2 tenants on them. So, there are 100 paying tenants. On average, each tower has 1.22 tenants. Therefore, the “co-location” rate is 22% or 1.22x. Another 31 towers are under construction.

Tower One Signs Blockbuster Development Deal for 150 New Towers

Management recently generated $3.4M in non equity-dilutive working capital by selling 23 towers in Colombia for 15 times Tower Cash Flow (“TCF“).Tower One built them for US$900K, and sold them for US$2.6M. The Company just signed a development deal with a Third Party for the construction 150 towers in Colombia & Mexico. This is perhaps the biggest event in the Company’s history. US$1.8M has already been advanced. Funds drawn down have a 0% (zero) interest rate and there are no debt covenants. Instead, milestones dictate the release of funds. There’s no cap on how much the Third Party will advance.

The Third Party will purchase towers from Tower One at 15x TCF in the first year. Then, for a period of 2 years, the Third Party will pay 10x TCF for every additional tenant that lease the towers. TCF is 80%-85% of gross tower rent. It costs Tower One $85K to build a tower. It can sell it to the Third Party for $148.5K ($1,000 rent x 12 months) times a 82.5% TCF margin = $9,900 in annual TCF. $9,900 times a 15x multiple = $148.5K/tower. Plus residuals, or earn-outs of 10x TCF for additional tenants. If on average the sold towers were to have 1.2 tenants after 24 months, that would be an incremental $19,800/tower, for a total of $168,300. At 1.3 tenants/tower, it would mean an extra $29,700/tower.

This is an attractive deal for both parties, the Third Party gets cash-flowing towers where the heavy lifting has already been done and at an attractive price. Tower One benefits as it could end the period (after selling 150 towers) with several million in cash & minimal debt. Management will then be in a position to obtain longer-term, lower-cost funding from a wider range of entities. Tower One will keep the towers it builds using its longer-term funding, allowing those assets to grow more valuable. {see What Might a Tower be Worth? section below}

Despite my enthusiasm, it’s far from certain that this Company will thrive. Management needs to execute, which has been a big problem because Tower One has been underfunded & understaffed. If management can arrange steady, multiple-year funding from this Third Party and other sources, they will be able to focus on what they do best… building & leasing towers!

Co-location Offers Huge Incremental Margins

Co-location is the secret sauce of the tower leasing model. 90%+ of the total cost for 2 or 3 co-located tenants, is incurred at the time the tower is built. The incremental margins are huge. Unused space available to host a 2nd or 3rd tenant is a valuable intangible asset. Tower One’s structures cost $80,000-$90,000 and can accommodate up to 3 tenants. Each tower is, “built to suit,” meaning that an anchor tenant is in place when the structure is completed. Contracts are long-term; 5-10 years, plus multiple 5-yr. options. Contracts are typically, “take-or-pay.”

Argentina, One of the Best Markets in the World

Argentina has a lot of tower infrastructure catching up to do. The economy languished under the previous government that was unfriendly to foreign enterprises (including wireless carriers, like Claro – Mexico and Telefonica – Spain). As a result, Argentina is one of the best markets in the world to be a builder of telecom infrastructure. Consider this commentary from last year….

Quote, Olivier Puech, CEO – LatAm, American Tower:

“Two critical factors pushed American Tower to enter Argentina. We are talking about a country which is lagging behind in the deployment of 4G, the densification of infrastructure & fibre connectivity. With about 15,000 existing sites, we estimate that at least 10,000 more are needed in the next few years to bring the level of coverage & capacity up to regional standards.”

10,000 new towers, split among 8 builders, over 3 years… that’s 417 towers per year, per builder. If Tower One could build 10/month in Argentina, (120/yr.) that would be a tremendous accomplishment, potentially setting the stage for a higher valuation. Mexico is also a strong telecom market, consider what a senior executive from American Tower said at a UBS event on 12/4/18,

I think Mexico has probably been our best international market over the last couple years from a growth rate perspective, driven by the deployment of 4G… So we think there’s a solid trajectory there, where you’re going to be able to sustain mid-teens organic growth…”

And, from American Tower’s February earnings call,

…In Latin America demand remains strong with carriers focusing on improving & extending 4G networks…. we expect new business additions to increase by ~10% year-over-year. Given the acceleration of network densification needs for 4G, we’re excited about our build-to-suit program. Our outlook implies new builds in LATAM will increase by > 50% versus last year. International growth was supported by significant network spending by tenants across our footprint, especially in key markets like Mexico…Our teams down in LATAM are really excited about the levels of investments that are being made all over the region…

What Might a Tower be Worth?

How much might a tower with a lifespan of 20+ years be worth? It’s reasonable to assume that the co-location rate will increase over time, but by how much and how quickly? In the chart below, I show that at $1,000 rent per tenant, per month, annual revenue is $12,000.For (an average of 1.1 tenants / tower, a co-location rate of 10%) annual revenue would be $13,200/yr., and it would be $14,400/yr., for (1.2 tenants / tower, a co-location rate of 20%), etc….

With annual revenue per tower currently $14,400, we can estimate the value of the Company’s towers. $14,400 x a 82.5% TCF margin x a 15x TCF multiple = $178.2K. The Company has 82 towers x $178.2K = $14.6M, just shy of twice the current market cap. {See chart below). Look at the valuation metrics for AMT, CCI & SBAC. The average multiple of (trailing 12-month) EBITDA, a proxy for cash flow, is 24.5x.

I assume an annual 2% rent escalator increases rent to $1,061 / month / tenant in 3 years, and the towers have an average co-location rate of 1.4x (40%) at that time. In 3 years, a tower at a 15x TCF multiple might be worth $220.6K {see chart above}. Three more years of +2% increases and the rent might be $1,126/month, and the co-location rate 1.6x (60%). In that scenario, a tower could be worth $267.5K. The point of this exercise is not to precisely say what a tower will be worth, but to show that increasing rents & co-location rates have a multiplier impact on tower valuations over time.

Despite the compelling math of potential tower valuation, timing is a big risk factor. If management were to take down a lot of debt, but then was delayed in their tower buildout, that would be a BIG concern. There have already been delays over the past 18 months. Some towers that were in backlog fell out of backlog. Luckily, the Company has a modest debt balance.

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Disclosure: I am/we are long TOWTF.