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Excerpts from this article appeared in the July 2018 edition of the Forbes Real Estate Investor.
As a REIT analyst, it’s my job to cover all sectors of real estate, including cell tower REITs.
In the 2016 Annual Report, American Tower’s (AMT) CEO James D. Taiclet, Jr. explains that “the mobile phone has emerged as an indispensable part of our daily lives. It has evolved from a simple talk and text device to a multi-functional necessity capable of internet access, entertainment, travel, health monitoring, document delivery, and personal navigation, among countless other functions. As these handsets and their capabilities have grown and evolved, so too have the mobile networks upon which they rely.”
I’m the father to five kids and this means I pay AT&T a healthy amount each month so that four kids and two adults can navigate the “indispensable part of our daily lives.” In fact, one of the reasons that I have made investments in the cell tower REIT sector is because it’s a way for to recoup some of the money that I am forking out monthly so my family can use their smart phones.
In the July edition of the Forbes Real Estate Investor (monthly newsletter) I explained that “major telecommunications companies will soon begin to roll out “new” 5G technology in the U.S., and I’ve been reviewing the issues, reliability and impact—for REIT investors.
With the debut of 2G in the early 1990s, wireless phone technology expanded from a voice-based technology to one that supported text messaging. 3G carried data in addition to text messages and phone calls, and 4G LTE (long-term evolution) enhanced those capabilities with greater speeds and greater reliability.”
5G brings a suite of new technologies, and among the most popular contenders are small cells, millimeter waves, massive multiple-input multiple-output (MIMO), beamforming and full duplex.
Essentially small cells are miniature cellphone towers that can be placed in inconspicuous places such as light poles and the roofs of buildings. They don’t require as much power as full-sized towers, and perform better when clustered together.
For investors, Connected Real Estate’s Rich Berliner says, “Delivery of 5G service will require wireless carriers to invest in more cell towers, as well as in small cell and fiber networks to broadcast 5G signals into specific areas. Implementation of 5G should be a massive home run for cell tower REITs and is expected to buoy revenue growth for the better part of the next decade. Companies with a specific focus on small cells may benefit the most.”
American Tower told Bloomberg “(that) ‘single tenant’ towers have gross margins of 40% from rentals… two tenants have 74% margins…three tenants have 83% margins.
As with anything, tower REITs will need to diversify and grow in any areas they can, possibly on an international scale. American Tower is looking into that aspect, as Crown Castle International is focusing on building up on U.S. soil, before 5G comes to fruition.”
Clients implementing public wireless internet connections may prefer 5G, with speed gains, cost reductions and ease of deployment—leaving behind big fiber-optic cable providers such as Uniti Group (UNIT) and Zayo Group Holdings (ZAYO).
Note: ZAYO is not a REIT yet but the company said it is likely converting on the REIT structure so I decided to include it in the article and will be adding it to the Intelligent REIT Lab soon.
How To Play It
American Tower, which was founded in 1995, is the fastest-growing player in telecommunications infrastructure. Its global portfolio includes more than 160,000 tower sites (40,000 U.S.) in various stages of wireless network deployment.
The $61 billion market cap company had first quarter 2018 consolidated adjusted funds from operations (AFFO) of $807 million, up 11.9% from first quarter 2017. American Tower has paid and increased dividends each quarter since 2012, has a current yield of 2.2% and a 43% payout ratio.
Recently, AMT tried to prevent contractors from constructing new towers within a half mile of existing tower sites, FierceWireless’ Mike Dano reports, but suspended the effort after opposition from industry players including AT&T and Verizon. Dano says it’s due “to increasing competition in the cell tower industry…hoping to cash in on the wireless industry’s collective move to 5G…and increased network densification.” I have AMT rated as a HOLD, due to valuation
Crown Castle International (CCI) owns, operates and leases more than 40,000 cell towers and approximately 60,000 route miles of fiber, across every major U.S. market, connecting cities and communities to data, technology and wireless services. In first quarter 2018, the company’s tower business signed comprehensive leasing agreements with several of its largest customers.
In fiber, small cell booking volume was comparable to all of 2016. AFFO grew 24% from first quarter 2017 to $558 million. With 8.5% annual dividend increases the past three years, Crown is targeting 7% to 8% annual growth. It has a current dividend yield of 4.1%, with a 77% payout ratio. With a premium share price, I’m recommending a HOLD.
Landmark Infrastructure Partners LP (LMRK), which has a current yield of 10.6%, leases assets to companies in wireless communication (70% of revenue), outdoor advertising (20%), and renewable power generation. Its real property interests underlie its tenants’ assets, including cell towers, rooftop wireless sites, billboards and wind turbines— triple net leased for predictable, growing cash flow.As wireless carriers deploy 5G, Landmark could see increased activity at existing and new sites, and modifications as sites add equipment. Landmark is expanding “outdoor” market share with ground leases that include digital billboards
Growth in renewable energy includes buying land under massive solar projects. About 85% of revenues are from large, publicly-traded companies including Verizon, AT&T, American Tower, Crown Castle and Outfront Media. Landmark paused its consecutive dividend increases until revenue catches up—they see 10% growth by the end of 2018. While this REIT doesn’t provide per-share data, I estimate solid growth. SPECULATIVE BUY.
Nationally, 5G requires small cells, which require fiber. Uniti Group (UNIT) has a large U.S. market share, with 1.1 million fiber strand miles of leasable inventory. Previously named Communications Sales & Leasing, Uniti still derives significant revenues from 2015’s Windstream Wireless asset spinoff. The company aim is 50% diversification by summer 2019.
Originally, a mostly single-tenant, one-property landlord, Uniti now has nearly 16,700 customer connections through three diverse, complementary business segments: fiber, tower and leasing. First quarter 2018 consolidated revenues were $247 million, with AFFO of $109 million.
UNIT has maintained a flat yearly dividend payout of $2.40 per share, currently yields 11.3% and has nearly a 97% payout ratio. Share price this year has increased 32%, which is satisfying, as I chose Uniti as my “Top Small-Cap Pick for 2018” in December. Volatility still plays a role in UNIT’s success or failure. SPECULATIVE BUY.
I own shares in CCI, UNIT, and LMRK.
