TWST: What do you cover in wireless space?

Mr. Lowe: I cover the tower companies. Those are American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC).

TWST: What are the most important investment themes you are watching in the tower space?

Mr. Lowe: Right now, really the key theme is the 3G to 4G migration and the corresponding investment cycle that the carriers are going through. Verizon (VZ) and AT&T (T) are leading the way. They are a couple of years into it. Therefore, they are ahead of Sprint (S), and T-Mobile (DTE.DE) is really just getting going. So from a tower perspective, anytime that we see this technology migration, whether it's 2G to 3G, now 3G to 4G, this isn't a one- or two- or even three-year investment cycle for the carriers. This is often a five- to seven-year investment cycle. So the towers are well positioned to benefit from those ongoing investments by the carriers in the wireless side of their business. Verizon and AT&T are a bit ahead of Sprint, and T-Mobile is just getting going.

When you step back and think about the big picture, having all four of the big major carriers in the U.S. investing simultaneously, this is first time we've seen that in a several years. The fundamental growth trends that are driving demand for wireless infrastructure, so for the towers, is as healthy as it's been in a long time.

TWST: How specifically does going from 3G to 4G impact the towers? Is it more towers or is it different types of equipment?

Mr. Lowe: When you see a technology migration, typically what happens is there are going to be multiple phases to that investment cycle. The initial phase is what we call an overlay. So take Verizon, for instance, they'll go back to their existing cell sites. And just as way of background, when you are driving and see a tower on the side of the road, if you look at one of these tall steel structures and you see multiple platforms on it, that typically means that there are going to be multiple carriers on that tower. Each of those platforms is a cell site.

Typically, what the carriers are going to do — and what we're seeing right now with 4G — is they are going to go back and maybe on an existing side they might have nine antennas and nine lines running down from the antennas down to the base station to connect to all of their equipment at the base of the tower, they'll go back and they'll add maybe three new antennas and three new lines. They add an equipment overlay to an existing site so that they can continue to offer the 3G services in that given area that they are already offering, but now with that new equipment, they can also start to offer 4G coverage in that area.

What that means from a tower perspective is that existing lease that's in place for that existing cell site, maybe call it on average about $2,000 per month per tenant for the tower, what this will do is drive an amendment when they come back and do that overlay where there is going to be an uplift in the rent that they're paying as they are adding more equipment.

It’s important to understand that the capacity constraint on a tower is not really space. It's more about weighting and wind shear because what you don't want to have happen is that you put so much equipment on a tower that when the wind starts blowing, the tower becomes unstable. The limitations are really going to be around weighting and wind shear, so that's how, generally speaking, the towers are going to price the rents that the carriers are paying.

If they come back to an existing site that has nine antennas and nine lines, and they add another three antennas and three lines, just rough numbers to give you an example, that will drive anywhere from $300 to $500 per month uplift in the existing rents on a base of $2,000. That's the initial phase of the technology migration, where the carriers are looking to seed the market and be able to say, "Hey, we've got 4G coverage here."

And then, as the handsets start to roll over in the market where people start going through that natural upgrade cycle and the mix of handsets that are 4G-enabled increases, then you get into the next phase of the investment cycle for the carriers where instead of just doing that overlay where they can say, "Hey, we can cover the major metro areas," now they are moving to more where they have to increase the capacity on that new network.

And so what that will drive is cell splitting, which is another term you'll hear thrown around. Essentially, cell splitting occurs when the demands on an existing cell site, which may cover a one- to two-mile radius, increase as more subscribers are using more data, consuming more data in that area, and the performance will degrade. When that happens, the carrier will have to go back and reduce the power so that the site is propagating the signal over a smaller radius to alleviate some of the strains being placed on that cell site. So instead of covering, say, a two-mile radius, the cell site may now cover a one-mile radius, and the carrier will then look for an existing tower within that given area where they can put up a whole new platform, so a whole new cell site. Instead of having one cell site covering a two-mile radius, now they'll have two cell sites covering that same area.

Instead of seeing that amendment activity — again looking at it from the perspective of the towers, where in the amendment part of the cycle, which is where we are predominantly today, where you get kind of that $300 to $500 uplift on an existing lease — now you see an increase in new site leasing on existing towers, where it will drive a whole new lease that's in the $2,000 per month per tenant range. The volume will go down, but the price point will go up as opposed to now — where the amendment-heavy part of the cycle. It's a small incremental dollar value per new amendment, but the volume of amendments offsets the smaller incremental dollar value of the transaction. So net-net, you are going to still see continued growth whether you are in an amendment part of the cycle or whether you shift a couple of years out to the cell splitting part of that investment cycle.

TWST: So no matter how you look at it, at least right now, the outlook is good for the tower companies. Is that right?

Mr. Lowe: It is. Things are good, and coming into 2012, once it was clear that the AT&T-T-Mobile deal was off the table, T-Mobile came back and re-emerged where they had not really been doing a lot of investing in the back half of last year due to merger uncertainty. But once that deal was off the table, T-Mobile re-emerged and started resuming their normal level of investment that you are going to see carriers do on an annual basis.

Now as we head into the back half of this year, one of the key areas of focus is T-Mobile has laid out their 4G LTE plans, which they are going to go back and hit their existing sites and add additional equipment and sometimes swap out equipment so that they can start shifting and migrating to LTE over the next few years. That's going to drive increased investment from T-Mobile.

I'd say, from a macro standpoint, for the tower industry it's probably as healthy as it's been in several years, and there is the potential for things to improve further in the back half of this year, and probably more importantly as you start getting into 2013 and you get T-Mobile fully engaged in their LTE rollout. Verizon and AT&T are going to continue to invest in that overlay. Sprint will be continuing to invest. As we go into 2013, you are going to have all four carriers that are really fully engaged and in full investment mode.

TWST: You mentioned lease agreements several times. Do any of the carriers own their own towers?

Mr. Lowe: They do. If you look back at the history of the tower industry, if you go to the late 1990s, before there were really any kind of true national carriers, the carriers owned their own towers. And then once they secured the spectrum positions so that they could start rolling out nationwide coverage, which required significant capital, they decided that it doesn't make economic sense to have capital tied up with the towers, where it's just going to be our own cell site on the towers. Why don't we do a sale leaseback with these independent operators, where we'll sell them the towers, and in return we get a capital infusion that can help fund the buildout of our wireless network? So it's a win-win. It frees up capital for the carriers, and then, on the independent tower side, the initial returns of buying the towers and having one tenant on it really isn’t that attractive.

Where the returns get attractive for the towers is where you can increase the average tenancy on the towers from one to two tenants, and then three-plus tenants on a tower. That's where the returns get very attractive.

So now as we stand here today, AT&T still has some towers that they own. T-Mobile still has a chunk of towers that they own, and that's another key area of focus that people are waiting to see what happens. Before AT&T came in and made the offer for T-Mobile, T-Mobile's tower portfolio, which is somewhere in the neighborhood of 7,000 towers, was on the market for sale.

And it was the same idea where the parent company, Deutsche Telekom, wants T-Mobile ultimately to be self-sustaining, where they can generate sufficient cash flow on an annual basis to be able to fund the necessary investments they have to make. As a result, T-Mobile's tower portfolio is now back on the market. I think in the back half of this year there is an expectation that we are going to see that tower portfolio trade and that T-Mobile will sell it to one of the independent operators to free up some more capital to help fund the investment plans they've laid out. Some of the carriers still have some tower portfolios, but if you look at the overall total market for towers in the U.S., the independent operators probably control about 75% of that total market. So the carrier-owned is a minority portion of the overall tower market at this point.

TWST: Who are your favorite names, and why do you like them?

Mr. Lowe: I guess if I had to rank them, American Tower would be number one; Crown Castle, number two; and SBA Communications, three. American Tower has the most scale and is well positioned to benefit from the attractive industry trends while also capitalizing on company-specific growth initiatives including their ongoing investment overseas.

I'd say when you look at AMT and SBA, they have been investing more aggressively over the past several years to expand their portfolio, and a big part of that, particularly for AMT, has been their expansion into emerging markets, where now international accounts are about 30% of their total business. What that should do is help them sustain higher growth rates going forward as the domestic business matures. What they have done is redeploy that capital from the domestic business and looked to take that colocation model — so the idea of having multiple tenants on a single piece of infrastructure is colocation whether you are talking about towers or data center — and introduce that colocation model into emerging markets, where it's kind of the way the U.S. looked 10-plus years ago, where the carriers predominantly own their own tower portfolios and there aren't really a lot of independent operators.

AMT has gone into a lot of these emerging markets and introduced this model, where they are doing sale leasebacks with some of the incumbent carriers in those markets, and they'll buy that tower portfolio again. It will have a low average tenancy, and then they are going to increase that cash flow on those sites over time as they add tenants. That serves to enhance and extend their growth opportunity. AMT has been the most aggressive on that front. SBA has followed too to some extent, but international is pretty small.

Crown has taken the approach that they don't really feel like you are getting an adequate premium return to go into those emerging markets, where there is inherently higher risk. What they have done is chosen to, one, redeploy their capital in terms of buying back stock, and then, this year, we've seen them step up their investments, where they have made some big investments on the distributed antenna side, or DAS, which is small cell architecture, where you think about the traditional tower model as a macro cell.

We are seeing small cells deployed in areas where carriers can't get adequate coverage with macro towers, whether it's because of local zoning restrictions, where they don't want a big, 200-foot steel structure in a given area, or if it's just limitations from a topography standpoint, where you just can't get adequate coverage. So one option for carriers is to deploy these smaller cells to increase the capacity in those areas.

You've seen over the past several years Crown trade at a discount to its peers. It's a relative value play within the group, but looking at AMT and SBA, both have been able to generate attractive growth, though SBA is running at a much higher leverage to help fund that growth. And so when you think about it from a cost-of-capital perspective, AMT has significant advantage on that front, and they are able to still maintain very attractive growth rates.

Out of the two faster-growth names of AMT and SBA, my preference would be AMT. And then, Crown still represents a relative value play out of the three, although that gap has started to close this year as they've stepped up their investments and been rewarded for doing so, in my opinion. But again at a high level, all three from a fundamental perspective are well positioned to benefit from the secular growth trends driving ongoing investment by the carriers. Putting SBA at three is ultimately more of a valuation call.

TWST: You said there are three public companies. Are we going to see anybody else going public because of the towers being so well positioned?

Mr. Lowe: Well, it's a good question. I think at this point there is probably one potential candidate, Global Tower Partners, which is the largest private operator and the fourth-largest operator overall behind AMT, Crown and SBA. The second-largest private operator, TowerCo, was actually recently acquired by SBA. That acquisition is still pending and is expected to close in 4Q, but that will bring together the number three and number five players in the U.S. Now, you've got the three publics that are really head and shoulders, much larger than the next largest operator in Global Tower.

I don't really have any unique insight into whether we should expect to see Global Tower access the public markets in the near future, but that's really the only one at this point that has sufficient size and scale where it could make sense to see them as a public company.

TWST: Thank you. (LMR)

Note: Opinions and recommendations are as of 07/06/12.

Ben Lowe

Associate Analyst

Stifel, Nicolaus & Co., Inc.

501 N. Broadway

St. Louis, MO 63102

(314) 342-2000

(314) 342-8476 — FAX