This article is sponsored by Ardian
Ground leasing typically refers to a business model involving the acquisition of ground leases under cellphone towers. Cellphone towers are seen as an attractive core infrastructure investment in their own right as they provide an essential service to mobile network operators and ultimately their customers and revenues are therefore very sticky.
The ownership of the ground leases where the cellphone towers are sited has historically been extremely disaggregated, however. Michael Obhof, senior managing director within the infrastructure team at Ardian, says a majority of ground lease sites in the US are still owned by individuals, who get paid for allowing cellphone towers to be erected on their land.
The infrastructure investment thesis for these ground leases is very similar to the investment thesis for the cellphone towers, however, believes Obhof.
How did you become involved in ground leasing?
We created a joint venture with a ground leasing business called Unison in 2021. Unison actually started out in this field in 2003 when there was very little competition. There still are relatively few players in this market when compared to the tower companies themselves, but the investment thesis is compelling.
If you believe that towers are sticky, then the ground leases under the towers are stickier still. Churn rates for cellphone towers are around 1 percent. The churn rate for ground leases is typically lower.
What makes this sector particularly attractive is that we are investing into existing assets but generally speaking with a 5-7 percent current cash yield. That makes this a very exciting and yet safe sector and a great business to invest in.
Why was it the right platform investment for you to make in this space?
It was a joint venture where they are exclusively bound to us and us to them. As I mentioned, Unison started out in this sector two decades ago but then partially wound down in 2016 when the management team went into partial retirement having built up four portfolios of ground lease investments over the years with other financial backing.
But then the chief executive Dewey Shay realised that he wasn’t ready to retire and wanted to do this again. He wasn’t starting from scratch therefore, but did need to find another financial partner.
Part of the core team was still working at a scaled down Unison, including the head of origination and legal counsel. Dewey was also able to bring back other former members of the team including chief operating officer Caitlin Garzoli, who rejoined the business in 2021 having spent several years at American Tower.
From our perspective, Unison had the edge over other competitors in the market precisely because of this great track record. We were backing a highly experienced management team and, while there was a couple of million dollars of assets at closing, this was essentially an equity commitment.
Where we really saw the value was in the aggregation of ground leases. This was more attractive to us than acquiring a larger player with a pre-existing set of stable assets. The aggregation phase offers higher returns than a mature portfolio and that was a big part of the attraction for us.
What are the biggest challenges associated with the ground leasing business and how can these be overcome?
One of the biggest challenges is the fact that the average deal size is so small. In the US, the average ground lease purchase is between $400,000 and $500,000. In Europe, it is even smaller at around $100,000.
Having the resource and skill to originate at scale in a cost-efficient way is therefore critical as there is an immense amount of work involved, not just in finding potential landowners but also in the legal closing process. Unison has well over 100 employees and it isn’t easy to originate low-value deals of this nature effectively with that kind of overhead.
It is important to be able to originate, sign term sheets and close quickly. We are seeing a number of these acquisitions a month. Having a regimented process is paramount, as the longer a potential deal sits out there unsigned, the more likely that a landowner could change their mind or someone else might come along and put in an offer.Once we entered exclusivity with Unison, we were able to take a more in depth look at precisely how that process works and I continue to be amazed at just how regimented and efficient that process is.
How do you see the ground leases sector evolving?
We weren’t the first infrastructure investors to invest in this space. It was my old firm, Goldman Infra, that bought Unison’s first portfolio back in 2006. Meanwhile, over the past couple of years, there have been a number of other new infrastructure investor entrants, including EQT, PSP and DigitalBridge.
I think the sector, which has historically been viewed as rather niche, is really just now starting to come into the centre fairway. People are beginning to recognise the underlying infrastructure dynamics that the sector offers. If anything, ground leasing leans towards core, although the aggregation element is more value-add.
Of course, these attractive characteristics could mean more new entrants to the space, but it isn’t as easy to start up as a ground lease aggregator as it may be in other sectors; you need the resources and you need the processes.
The fact that Unison figured all of that out so long ago has kept the competition at bay to a certain extent. There is a real scarcity of experienced management teams, which creates a natural barrier to entry.
For Unison specifically, we have now invested total debt and equity of around $400 million, so we have achieved significant scale. If you had told me two years ago that we would have reached that level of growth by this stage, I would have been pleasantly surprised. We still want to invest around another $400 million-plus of enterprise value into the business, however, so that is the plan.
Are you seeing any innovation in the way that ground leasing is done?
Traditionally, ground leasing has focused on the ground underneath cellphone towers. However, we have also bought a number of assets involving fibre-based infrastructure, including local exchanges. In the past, that has been viewed more as real estate, but I would say that the infrastructure characteristics are clear.
The local exchange is the point at which all the various fibre interconnects with each other. In order to move a local exchange, you would have to rip up all of those different fibre lines, which, of course, makes it incredibly sticky, which is why we have branched out in that direction as well.
Finally, we have just started acquiring ground leases for renewables – solar farms and wind farms.
That still represents a relatively small part of the overall business at around $20 million of enterprise value out of $400 million. But it is an exciting area of potential growth and we expect to build out further in the next six to 12 months.
Is this a sector that has been materially impacted by the current macroeconomic environment?
Ground leasing has remained relatively resilient for precisely the same reason that the tower sector has remained resilient. These are real assets that are in real demand. There is still a significant build out of towers required in order to facilitate the rollout of 5G and that means there is significant potential for the aggregation of further ground leases.
I would say, however, that investors have started to dig deeper into management teams and their origination capability. They are comfortable with the strong infrastructure characteristics of the assets themselves but the real value lies in the ability to grow. That said, we have not seen valuations for these assets fall away in any meaningful sense and I think as the current macro situation plays out, this is a sector that will have proved itself to be resilient.