According to filings, two billionaires’ own shares in the cell tower REIT known as Crown Castle (CCI). The Bill and Melinda Gates Foundation purchased 5.33-million shares in Crown Castle (valued at $627.5 million) in early 2019 and President Donald Trump has owned shares since I referenced in an article in October 2016. Based on the chart below, it appears that these two billionaires are doing okay with their REIT picks:
Source: Yahoo Finance
Of course, the great thing about REITs is that you don’t have to a billionaire, or even a millionaire, to own shares. All it cost is the price of one share, and in the case of Crown Castle, that equates to $132.52 (keep in mind, you can own fractional shares).
Based upon the chart above, it appears that the price tag for purchasing shares in Crown Castle has become rich. Since October 2016 (when I wrote the Trump article), shares in Crown Castle have returned 58% (annualized ~18.5%), making it seemingly difficult for Average Joe or Jane to get a slice of the great America cell tower pie.
Or maybe the price isn’t that high?
Afterall, my cell tower bills are getting more and more expensive (yes, I have 5 kids and 6 devices that I pay for every month) and my last bill was ridiculously costly, thanks in large part to my daughter who forgot to buy the international plan before taking a cruise to the Bahamas.
I’m also glad that I was able to grab some shares in Crown Castle a few years ago, and I have been steadily increasing my exposure, when the “price is right”.
I know what you’re thinking…when is the price right?
Well, come on down, because you’re the next contestant…
The Business Model
According to Hoya Capital Research the “Cell tower REITs comprise roughly 10% of the REIT ETFs (VNQ and IYR)” yet these REITs “account for roughly $160 billion in market value”. Our iREIT snapshot provides a vivid picture of the size of the cell tower REIT universe:
Hoya explains that “Cell tower REITs are on the growth side of the real estate spectrum and generally pay a low dividend yield but have achieved some of the highest internal and external growth rates across the real estate sector over the past decade.
Cell tower REITs own roughly 50-80% of the 100-150k investment-grade macro cell towers in the United States. For this reason, while cell towers may constitute only a tiny portion of total real estate asset value in the United States, they constitute a disproportionally high importance in the market capitalization-weighted investible real estate indexes and in fact, American Tower (AMT) and Crown Castle are the two single largest REITs.”
Cell Tower REITs are considered infrastructure platforms and Crown Castle boasts a diversified model that includes 40,00 towers, 65,000 small cells, and 70,000 miles of fiber.
Source: CCI Investor Presentation
One of Crown Castle’s primary drivers are small cells that enable additional network densification by offloading traffic and bolstering capacity in the areas of the network where data demand is the greatest. As illustrated below, fiber fed small cells enable wireless carriers to add much more needed coverage and capacity to relieve congestion on their networks.
Source: CCI Investor Presentation
On the latest (Q1-19) Crown Castle’s CEO, Jay Brown, said it like this,
“To this end, we are excited about the significant investments we are making to build new fiber assets as we pursue this expanding small-cell opportunity. By focusing our investment in high-capacity fiber across the top markets where we see the greatest potential demand for small cells, we believe we are extending the potential long-term growth in cash flows and dividends per share.”
“…we expect to nearly double the number of small cells we deploy in 2019 after installing a record number of small cells last year. Our strategy has positioned us to take advantage of the increasing activity by our wireless customers as they respond to the continued growth in data.”
Source: CCI Investor Presentation
Fueling the Growth
Like most REITs, one of the ways that Crown Castle scales its business is to generate low cost of capital. On the debt side, the company is rated BBB- by S&P (so is AMT) and in February (of this year) the company issued $1 billion of unsecured notes with 10 and 30-year maturities and in June (of this year) it increased the commitments under its Senior Unsecured Revolving Credit Facility by $750 million, for total commitments of $5.0 billion.
We estimate Crown Castle’s WACC to be around 4.25% (using latest closing price of $132.52) and this provides the company with tremendous pricing power to take advantage of favorable market conditions. The updated debt terms locks in the company’s long-term interest rates and extends the weighted average maturity of outstanding debt to approximately 6.5 years.
The breakdown of revenue for Crown Castle is about 75% fiber and 25% small cells and this provides the company with an attractive and opportunistic blend of yield. Given the scale and expanding footprint the company is well-positioned to generate significant growth in the years ahead. As the CEO explained,
“…we’re on pace as we talked about to be able to put the number of small cells on air this year of about double what we did in 2018. That activity is ramping through the course of 2019, such that by the end of 2019, we think we’ll put about double the number that we had in 2018 on air.”
Translation: “we are investing in our business to generate future growth while delivering dividend per share growth of 7% to 8% per year”.
Sizing up the Opportunity
As you can see below, all three cell tower REITs are trading at premium valuations, based on their current P/AFFO multiple:
As you can see below, Crown Castle has a higher dividend yield, but also a higher payout ratio (than American Tower). SBA Communications (SBAC) does not pay a dividend.
Now let’s consider the forecasted growth for these three REITs, based on AFFO per share (source: FAST Graphs):
In conclusion, we don’t think that the “price is right” for Crown Castle (for initiating a new position) and we recommend waiting on a pullback. Regardless of the 5G demand story, we see no margin of safety at this time and we are maintaining a HOLD while continuing to collect the dividends. Like the Gates Foundation and President Trump, I am happy to own a slice of the great American cell tower REIT, and for a more speculative slice of pie, try Landmark Infrastructure (LMRK) – just wrote on article HERE.
Source: FAST Graphs
Author’s note: Brad Thomas is a Wall Street writer, and that means he’s not always right with his predictions or recommendations. Since that also applies to his grammar, please excuse any typos you may find. Also, this article is free, and the sole purpose for writing it is to assist with research, while also providing a forum for second-level thinking.
I am/we are long CCI, LMRK
Brad Thomas is CEO and director of Research at iREIT with over 30 years of real estate experience. In addition, Thomas is the Editor of the Forbes Real Estate Investor, a monthly subscription-based newsletter.
Thomas has also been featured in Forbes Magazine, Kiplinger's, US News & World Report, Money, NPR, Institutional Investor, GlobeStreet, CNN, Newsmax, and Fox. He is the #1 contributing analyst on Seeking Alpha in 2014, 2015, 2016, and 2017 (based on page views).
Thomas has co-authored a book, The Intelligent REIT Investor, and is the author of The Trump Factor: Unlocking The Secrets Behind The Trump Empire (available on Amazon).
Thomas received a Bachelor of Science degree in Business/Economics from Presbyterian College and he is married with 5 wonderful kids.