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Cell Tower REITs: The true killer app of 5G



REIT rankings: Cell Towers

In our REIT Ranking we introduce and update readers for every commercial and residential real estate sector. We analyze REITs within the sectors based on both common and unambiguous valuation metrics. In doing so, we offer investors numerous options that fit their own investment style and their return and risk objectives. We update this ranking quarterly with new developments.

  REIT Overview of the Cell Tower

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Overview of the Cell Tower Sector

The Cell Tower REITs account for approximately 10% of the REIT ETFs (VNQ and IYR). In the Hoya Capital Cell Tower REIT Index we are following the REITs with three cell towers that have a market value of approximately $ 160 billion: American Tower (AMT), Crown Castle (CCI) and SBA Communications ( SBAC). , Cell Tower REITs are on the "growth side" of real estate and generally pay a low dividend yield, but have achieved some of the highest internal and external growth rates in the property sector over the past decade. Investors looking for a focused but diversified exposure to this sector should consider the Benchmark Data & Infrastructure Real Estate ETF (SRVR).

  REITs by Cell Tower

More than any other real estate sector, the ownership of Cell Tower is very focused. The Cell Tower REITs have about 50-80% of the 100-150,000 investment grade macro-cell towers in the United States. For this reason, although cell towers are only a small part of the total value of property values ​​in the United States, they are disproportionately high in the market capitalization weighted investable real estate indices. In fact, these are the American Tower and Crown Castle the two largest single REITs. The strong performance of Cell Tower's REITs over the past two years has largely explained the underperformance of the traditional "core" real estate sectors.

  REIT at a Glance

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Consumers want both and ] mobility but due to the physics and economics of data transmission, there is often a compromise between the two. For pure speed and low latency, a sturdy, fiber-supported or dense 5G small cell network is ideal. This requires the laying of thousands of kilometers of underground cables and / or hundreds of thousands of small cell basic cells using the high band spectrum. For pure mobility, a far-reaching macro mobile network with high-power transmitters with a smaller and wider range is ideal. This requires a network of macro towers, but each tower is capable of serving tens of thousands of devices, not tens or hundreds of customers per antenna with small cells.

  Cell tower networks

As consumers both and speed and mobility, and neither of the two players is able to fully meet these two requirements. A mix of technologies – including macrocell networks – continues to be used to meet the growing demand for data connectivity. It is important to know that both AMT and SBAC have significant international activities, while CCI is a pure US operator. AMT and SBAC focus on the macro-tower business, while CCI has invested heavily in fiber and small cell networks in addition to its primary tower business.

Bull & Bear Thesis for Cell Tower REITs

Our research results continue to point these macrocell towers offer the most economical mix of coverage and capacity, and the recent challenges associated with using the dense microcellular network have convinced us confirms that macro towers will be the "hub" of next-generation networks for the foreseeable future. While communication technology is changing very rapidly, it seems that the physical and economic constraints of alternative technologies (low-orbit satellites, widespread small cell networks, and outdoor Wi-Fi) are not diminishing rapidly, and the risk of technological obsolescence of the technology is scarce change The 5G era is often overrated.

  5G vs. 4G

Cell Tower REITs remain a strong competitive position in the telecommunications sector. The mobile operators sold their tower systems from the mid-2000s to reduce their balance sheet and release capital for the expansion of their networks. Supply growth in the US is almost non-existent, as the local licensing process creates significant market entry barriers. The relative scarcity of cell towers combined with the absolute necessity of these towers for cell networks has given these REITs considerable pricing power. While cell operators have attempted to lift the towers themselves by building or purchasing towers themselves, carriers have limited capital available for these initiatives, particularly in view of the capital-intensive 5G roll-out.

<img src = "https://static.seekingalpha.com/uploads/2019/4/1723581_15559487666581_rId16_thumb.jpg" alt = "bullish Cell Tower

<img src =" https: //static.seekingalpha. com / uploads / 2019/4 / 1723581_15559487666581_rId16_thumb.jpg "alt =" 19659018] The four-year strong performance has raised Cell Tower's REIT ratings to a higher level than the rest of the property sector. Of course, the land under the cell towers is not worth much without a working macrocell. Although we do not believe that there is an immediate risk of technological obsolescence, it is impossible to predict technological innovation in a decade, let alone several decades. In addition, there are only four main players in the US carrier industry (and possibly three if the merger is approved by Sprint / T-Mobile), which limits the number of potential tenants for these REITs. Carriers are encouraged to invest capital in alternative technologies such as Small Cells and DAS to reduce the competitive position of mobile masts. Probably the greatest risk is the fact that these REITs own only 30% of the land under their structures and the other 70% lease through (usually long-term) leasehold leases.

  2019 bearish cell towers

Sprint / T-Mobile offer potential results

The Cellular Tower REIT industry is still waiting for the outcome of the Sprint / T-Mobile merger, which may affect the competitive momentum in the telecommunications sector. Earlier this year, the third and fourth largest US mobile operators announced a long-awaited merger agreement that would bring the industry to three near-equivalent competitors, alongside AT & T (NYSE: T) and Verizon (NYSE: VZ). After years of discussion and a failed attempt to merge, which was blocked by US regulators in 2014, the two companies finally came to a possible $ 26-billion deal. The merged entity would account for around 35% of total mobile connectivity in retail, including 25% of prepaid subscribers and nearly 60% of prepaid subscribers.



While Sprint (NYSE: S) and T-Mobile (NASDAQ (TMUS) combined account for 26% of total industry sales, the "overlap" between Sprint's and T-Mobile Cell Tower's sites is approximately 4% This 4% represents a "worst-case scenario" in which T-Mobile is completely shutting down the sprint network on redundant towers and does not need to retrofit its equipment to handle the increased capacity. Focusing on the US would be the hardest hit, while American Tower, which has a significant international presence, is relatively unscathed.



Last week, the Wall Street Journal reported that Justice Department T-Mobile informed Sprint is of the opinion That the deal will "probably not be approved as currently structured." The general consensus among analysts is that the chances of getting approval now are About 75% are late last year dropped to its current level below 50%. As we discussed in our last update, we believe that the approval of the merger is likely to depend on the probability of the regulator's assessment and the forecasting of four key unknown factors, ranked in order of importance.

1) Can Sprint survive without fusion?
2) Would Sprint have other providers (cable companies, tech companies)?
3) Would a merger support or affect the growth of 5G?
4) Is wireless broadband a competitor of domestic broadband providers?

Given the uncertain answers to these four questions and a wide range of possible outcomes, analysts are generally split as to whether REIT investors should be Cell Tower or versus . the possible merger. In our opinion, Cell Tower REITs would ultimately benefit from a no-deal outcome, but the downside risk is greater if Sprint were to fail as a result. We outline our assessment by analyzing the three possible outcomes.

Scenario 1: Fusion approved

The mobile industry would merge into three equally sized players. With more balance sheet capacity, the merged T-Mobile would likely increase network spending in line with Verizon and AT & T, leading to an immediate increase in Cell Tower's REIT revenues. With one competitor less, the 5G rollout will start sooner, but will focus on higher value markets, and consumer pricing is likely to be less competitive, resulting in higher margins for airlines, but may spur further investment in the network would. Over time, however, the competitive position of REITs for cell towers would deteriorate. Carrier initiatives to leverage Cell Tower's REITs, including building their own towers or taking over REIT lease contracts, would be progressively more successful and growth would slow down as inflation continues to be favorable for Cell Tower REITs stay

Probability: 50%. For Cell Tower REITs: Decent / Failure Result

Scenario 2: Merger rejected. Sprint Finding Third-Party

The merger is rejected, but Sprint's undervalued and valuable network and spectrum assets are of interest to broadband cable providers (Comcast (NASDAQ: CMCSA), Charter Altice) who are aware of the growing and legitimate 5G threat Wireless Broadband, which we believe is underestimated by the market. Alternatively, a cash flush technology company (Amazon (NASDAQ: AMZN), Google (NASDAQ: Jag) (NASDAQ: .08), or Microsoft (NASDAQ: MSFT) views the assets as an undervalued compliment to the existing data center infrastructure and a new distribution source Sprint can use this partnership to become a legitimate space competitor while T-Mobile continues to drive its customers to industry-leading rates, with the carrier industry remaining with four players, T-Mobile The four airlines are fighting for leadership in 5G and access is widespread, initiatives to influence Cell Tower's REITs are largely unsuccessful and price power remains strong

Probability 35%. For Cell Tower REITs: Best Result .

Scenario 3: Merger rejected. Sprint fails

The merger is rejected Sprint can not find a suitable partner. Sprint's investors, including SoftBank (OTCPK: SFTBY), are reducing their investments, and the network continues to lag behind the other three carriers and continues to lose customers until it is unable to continue operating. The bankruptcy will divert Sprint's assets to the telecommunications sector, including AT & T and Verizon, further strengthening the impact of the emerging duopoly. T-Mobile's strong performance is slowing down and can not keep up with the network expenses of the two main players without the added benefits of Sprint. The carrier industry will become a de facto duopoly and the positioning of the REIT competition will be significantly reduced. Consumer pricing is far less competitive and the introduction of 5G continues, but is isolated only in the highest-margin implementations. Carrier initiatives to leverage Tower REITs are broadly successful, and in recent years the industry has become more akin to the data center's REIT sector, with internal inflation rates under inflation and low pricing power over increasingly dominant tenants.

Probability 15%. For Cell Tower REITs: Worst Outcome.

Cell Tower Basic Performance REIT

2018 was another strong year for the cell tower sector as the early effects of network densification on 5G networks enabled above-average organic growth. Organic tower revenue (19459007), which is the same name as NOI continues to grow at an industry-leading rate of 6% + as carriers continue to invest heavily in network consolidation and equipment upgrades. Due to the high leverage inherent in the co-location tower model, the REITs of the tower systems are of increased use.

  Cell Tower REIT AFFO

These REITs forecast an average 8% increase in AFFO shares per share 2019 is one of the strongest growth rates in the real estate sector. In addition to robust organic growth, external growth through strategic acquisitions remains a key focus of Cell Tower's REITs, backed by the capital cost benefits of these companies. As we will discuss shortly, the Cell Tower REITs trade at an estimated premium of 30-50% on the private market-implied net asset value, which means that external acquisitions, albeit somewhat limited, will easily result in returns.

<img src = "https://static.seekingalpha.com/uploads/2019/4/1723581_15559487666581_rId24_thumb.jpg" alt = "REIT Tower Sitse [19659043] The combination of strong organic growth and sustained external growth resulted in the year In 2018, total property revenues increased 16% from 2017 levels in 2017, supported by the impact of the merger of Crown Castle with small cell operator Lightower, which, while seemingly very conservative, gave evidence that real estate revenue will rise 5% in 2019.



Carrier Performance & Capital Spending

Cell Tower REITs are inextricably linked to the underlying performance of their tenants by cell operators, which delivered another very strong year. T, Verizon, T-Mobile and Sprint together generated more than 4.5 million postpaid mobile customers in 2018, a significant increase over the 3.8 million illion in 2017 and the strongest year for mobile operators. Prices are still very competitive, with customers seeing an average drop in their phone bills of 3% on average.

  Carrier Price

Mobile operator investment is an important growth driver for Tower REITs. Investment by US carriers has been sluggish in the past two years as much of the available capital has been spent on spectrum acquisition, which will drive next-generation 5G networks. Investments are expected to increase again as operators start to set up 5G networks over the next five to ten years.

  Network Output Cell

Recent & Long-term Portfolio Development

Since NAREIT began tracking the sector in 2012 Cell Tower's REITs surpassed the REIT index every year except 2014. Cell towers are still one of the few remaining growth engines of the REIT sector. Given the positive operating environment expected for 2018-2020, it does not seem to slow down in the foreseeable future.

  REIT sectors

Despite the merging uncertainties, the good times for the REIT sector for cell tower have continued this year. The Hoya Capital Cell Tower REIT index has grown more than 19% this year, compared to a 14% increase in the broader REIT index. Falling interest rates and signs of slowing global growth have raised REIT ratings after the worst year since the recession across the industry.   Cell Tower REIT performacne

For the past two years, American Tower has been at the forefront, followed by SBA Communications. Investors are somewhat skeptical in view of Crown's significant investment in fiber and microcells in recent years, which explains some of the underperformance since 2016.

  Cell Tower REIT Stocks

Cell Tower REITs Review

The strong performance of the last four years has driven Cell Tower's REIT ratings to the most expensive end of the real estate sector. Cell Tower trades at a significant REF average free cash flow premium (also known as AFFO, FAD, CAD), but after taking into account industry-leading expected growth rates, Cell Tower's REITs are very attractive based on the FCF / G metric , As discussed above, the Cell Tower REITs are trading at some of the widest real estate NAV premiums, giving these companies "cheap" equity to drive further external growth.

  Cell Tower REIT Rating

Cell Tower REIT Dividend Yield

Cell Tower REITs are among the lowest yielding REIT sectors. They only pay 53% of their free cash flow and stop investing that capital to drive external growth. The industry pays an average dividend yield of 2.2%, which is among the lowest among REITs.

  Cell Tower REIT dividend yield

Within the sector, only Crown Castle looks like a typical REIT when it comes to payouts. CCI pays a healthy dividend yield of 3.7%, AMT pays 1.9% and SBAC does not pay any dividends.

  Cell Tower Dividend

Cell Tower REITs & Interest Rates

Cell Tower REITs are heading toward the "growth" side of the real estate sector, which is more responsive to expectations of economic growth than interest rate changes -Sectors are the third least-interest sector for cell masts and could compensate for an otherwise interest-sensitive REIT portfolio.

  REIT Interest Rates

Within the sector, AMT and SBAC are classified as growth REITs, CCI, which has a dividend of 4 % pays is a hybrid REIT and has characteristics more in line with REIT average values.

  INTEREST RATES

Conclusion: Wireless Broadband is the 5G killer app [19659070] With 5G On the horizon, Cell Tower REITs have outperformed the broader real estate sector over the last four years, with 5G technology disrupting the telecom industry We believe that the true "killer app" for 5G will be wireless broadband Internet, as dense small cell networks will allow operators to deliver fiber-like speeds without cables.

The technological limitations of 5G – especially the low coverage area – means that macro towers will continue to be the primary hub of mobile networks. Network Compression Increases Cell Tower's Sales. The Sprint / T-Mobile merger announcement continues. Just when a deal was imminent, a new curveball appears. We believe that Sprint's issues are overrated and that no-deal results would benefit Tower REITs.

Cell-Tower REITs continue to benefit from a favorable competitive position in the telecommunications sector. Low supply and high demand have led to a considerable pricing power for mobile operators. We analyzed the three possible merger results and believe that a no-deal scenario would be the best-case scenario for these companies. However, this analysis depends on our view that wireless broadband is indeed the 5G "killer app" and Sprint is a valuable partner or takeover target of a third party (cable or technology). [19659071] The risk of a no-deal outcome is that the carrier industry will become an effective duopoly, which would translate into a significant downside risk to the competitive position of the REIT sector with cell tower. The success of early wireless 5G broadband testing in a handful of US cities is closely monitored by all industry players, and Sprint's ultimate fate may depend on its relative success. If wireless broadband is indeed the 5G killer app that we believe could be it, the future looks bright for both REITs and mobile operators.

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I am / we are AMT for a long time, VNQ. I wrote this article myself, and it expresses my own opinion. I can not get any compensation for it (except from Seeking Alpha). I have no business relationship with a company whose shares are mentioned in this article.

Additional information: It is not possible to invest directly in an index. The index performance referred to in this commentary does not reflect the performance of any fund or other account managed or managed by Hoya Capital Real Estate. All comments published by Hoya Capital Real Estate are free of charge and are for informational purposes only and are not intended as investment advice. The data provided is historical performance, which is not a guarantee of future results. The information is considered factual and up to date, but we assume no liability for its accuracy.

Hoya Capital Real Estate advises an ETF. Real Estate and Housing Index Definitions are available on HoyaCapital.com.


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