Communication Towers, digital infrastructure or Infrastructure REITs are a narrow but important asset class within the real asset sector.  Within the United States, there are four major “Tower” REITs; American Tower, Crown Castle, SBA Communications and Uniti Group.  Outside of the US, there are very few ways to gain exposure from communication infrastructure.  Despite having a narrow focus and few listed names, the combined market capitalisation of the Towers sum to over US$200bn and are a staple of US Real Estate Investments with American Tower and Crown Castle surpassing all other US REITs in data center market capitalisation.

Name

Global Market Cap as at 30/11/2020 (USD)

American Tower Corporation

102,702

Crown Castle International Corp

72,273

SBA Communications Corp.

31,910

Uniti Group Inc.

2,393

Total Global Market Cap

209,277

What do Tower REITs do and how do they earn revenue?

Tower companies  REITs build, acquire and operate communication towers.  Towers are then leased to telecommunication service providers for a fee which escalates on an annual basis (typically 3-4%).  Each tower can host 4-5 carriers at capacity, though in practice 2 tenants per tower is more common.  It is important that the Tower owns the land parcel, tower structure and in cases a back-up power generator but the antenna equipment, station equipment and coaxial cables are owned by the tenant or telecommunication service provider.

 

Tower REITs build, acquire and operate communication towers

Tenant Profiles

It is worthwhile understanding the data center provider tenant base and their plans for access and use of telecommunication sites.  With the merger of T-Mobile and Sprint, as well as the emergence of Dish there will now be four key tenants for the Tower REITs.

  1.       AT&T – One of the largest communication and media conglomerates in the world with core telecommunication services, internet services as well as the ownership of Warner Media and its subsidiaries.
  2.       Verizon – The largest wireless, telecom group in the US
  3.       T-Mobile & Sprint – A merged group looking to scale its wireless internet and voice services
  4.       Dish – A pay TV and wireless communication company

Each telecommunication provider has its own capital expenditure plan and roll-out of new communication technologies.

Industry Trends and 5G

Looking at 2020 and into 2021 there are clear trends driving revenues for Towers.

  1.       Carriers are to deploy US$32bn of capital expenditures from 2019 to 2023 to densify the US network.  This includes existing 4G/LTE and the new 5G rollout.
  2.       The average tenancy of ~2 carriers per tower is likely to densify from 5G needs and as DISH builds out its capability.
  3.       More spectrum means a requirement for more area coverage.  The physical limitations of higher frequency spectrum also requires more points in a network.
  4.       Consumer uptake of 5G devices will accelerate the 5G rollout.  The iPhone 12 which is 5G ready will likely be the stepping on point for consumers.

These key drivers have given way to consensus revenue growth numbers of circa 6-8% for the three major Tower REITs.

Industry Metrics

Traditional metrics used in standard REIT analysis are not necessarily useful in investing across Towers.  For example, occupancy is less useful as it is typically 100%, we should look at tenancy per tower instead.  This drives yield metrics and return on investment capital.  Yields across geographies vary greatly and depends on the bargaining power supply of each service provider.  US yields are typically lower but compensates with the sheer volume of locations needed by each provider.  An additional tenant on a tower benefits greatly from operating leverage due to the lower incremental cost and large incremental revenue for each additional tenant.  In a portfolio aggregate, the Big 3 Tower REITs yield blend to a 10-11% tower yield.

From an investment perspective, it is worthwhile to understand the dividend yield metrics versus the growth prospects and how this compares to other real estate subsectors.  Undoubtedly, the dividend yield on the Towers are low and in the case of SBAC, much lower than even data centre peers.  SBAC, still in its capital expenditure heavy period will look to rollout towers and will take time to harvest the cashflows at a later time.  Given this, the growth of SBAC and its Tower peers is also worth mentioning.  SBAC is expected to grow its dividends by 150% in 2020 and 20% in 2021 going some way to catch up to its peer group.  AMT is expected to grow at a similar 20% CAGR over the next two years whilst CCI, the higher yield play will grow at a healthy 7% CAGR.

But how do Tower metrics compare with more traditional REIT sectors? We think positively.  Towers are among the fastest growing subsectors underwritten by a solid margin business.  It is worth pointing out that the EBITDA margin on a Tower is typically lower than a mall or an office building due to the operational cost of running adjacent infrastructure for its tenant base.  However, this cost is significantly lower than operating a data centre.

Short Company Profiles

The fund is invested across all three major Tower REITs a short profile of each follows.

American Tower Corporation (AMT)

American Tower is the largest Tower REIT globally with >40,000 US Towers averaging 2.6 tenants per Tower.  By most investors it is considered the industry leader and a quality play.  It is also well diversified geographically, with ~60% of its revenues coming from the developed world whilst the remaining points are in the high growth markets of India, Brazil, Mexico and Nigeria.

Crown Castle International (CCI)

Crown Castle is the second largest Tower REIT with ~40,000 US sites averaging 2.1 tenants per tower, it is considered the mature and highest yielding tower.  It is the only major to own 100% of its assets in the US and as a result has a lower growth, but more stable portfolio with its 80% AFFO payout ratio.

SBA Communications Corp (SBAC)

Though less than half the size of its largest competitors, SBAC is still a significant player with 16,700 US locations and a 10% market share.  Through still predominantly US exposed it has moved into emerging markets, in particular and Brazilian investment.

 

Risks

The Towers saw a quick rebound post COVID-19 as communication infrastructure remains an important key infrastructure in a data traffic and speed hungry world.  Key risks for the sector as a whole are:

  •         Slowdown in telecommunication spending and a slower uptake of 5G in general
  •         Shift away from licensed small cell infrastructure and toward fiber to the home with WiFi access points
  •         Further M&A within the four carriers leading to rationalisation of the network
  •         General interest rate risk as an alternative investment and as a levered vehicle
  •         Disqualification from the REIT classification

Community Impact

  •         Investing in a mobile future – As global leaders in communication infrastructure, American Tower Corporation and Crown Castle enables global access to telecommunication and the internet.  Without communication towers, technologies such as mobile data  internet and the rollout of 5G would not be possible.  Communication Towers make the mobile driven information age possible.
  •         A shared infrastructure model – A multi-tenant infrastructure reduces the total number of towers built, cabling used and energy waste.  Instead of each telecommunication provider building its own infrastructure, a multi-tenant model which is the core business model of AMT and CCI, is less wasteful.
  •         Stewards of Energy and Land – In reaching their end consumer, communication towers inevitably use energy and land.  However, it is increasingly important for them to be mindful of their environmental impact.  This is why American Tower Corporation is investing more than $100m per annum in energy efficient solutions such as on-site solar power generation to reduce its emissions whilst improving tower returns.  In addition, AMT has committed to reduce two hundred thousand metric tons of carbon dioxide from their tree planting initiatives.

Conclusion

Communication Infrastructure or Tower REITs are a growing, modest yield subsector of real estate.  Whilst they are a core part of US big data center investment portfolios, they are not accessible in most other markets making it a unique way to gain exposure to the growing rollout of 5G technologies globally.  With 5G still in its early stages of expansion and consumer penetration, the Tower REITs have a runway in which to grow quickly, then harvest cashflows later to grow distributions accordingly.  In addition to financial returns, they are a key piece of infrastructure in accessing mobile and internet services whilst reducing the total carbon footprint in a shared infrastructure model.

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