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Cell Tower REITs: 5Gs True Killer App

REIT Rankings: Cell Towers

In our REIT Rankings series, we introduce and update readers to each of the business and residential markets. We analyze REITs within the sectors based on both regular and unique valuation measurements, and present investors with many options that fit their own investment style and risk / return objectives. We update these rankings every quarter with new developments.

  REIT overview tower

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Cell Tower Sector Overview

Cell Tower REITs consist of around 10% of REIT ETFs (VNQ and IYR). Within the Hoya Capital Cell Tower REIT Index we track the three cell tower REITs, which account for about $ 160 billion in market value: American Tower (AMT), Crown Castle (CCI) and SBA Communications (SBAC). The cell tower REIT is on the growth side of the property spectrum and generally pays a low dividend yield, but has achieved some of the highest internal and external growth rates in the real estate industry over the last decade. Investors seeking focused but diversified exposure to this sector should consider Benchmark Data & Infrastructure Real Estate ETF (SRVR).

  cell tower REITs

More than any other real estate industry, ownership ownership is highly concentrated. Cell tower REITs own about 50-80% of the 100-150k investment quality macrocells in the United States. For this reason, while the cell towers can only represent a small part of the total property value in the United States, they represent a disproportionate importance in the market-weighted weighted investable real estate indices, and in fact the US towers and crown castles are the two simplest REITs. Strong performance from cell tower REITs over the past two years has explained much of the underperformance of traditional core businesses. ” data-width=”640″ data-height=”357″ data-og-image-twitter_small_card=”true” data-og-image-twitter_large_card=”true” data-og-image-twitter_image_post=”true” data-og-image-msn=”true” data-og-image-facebook=”true” data-og-image-google_news=”true” data-og-image-google_plus=”true” data-og-image-linkdin=”true”/>

cell tower REIT overview and consumers but because of the physics and economy of data transmission, there is often a switch between the two. For clean speed and low latency, a robust fiber-based or dense 5G small cell network is ideal. This requires laying thousands of subterranean cables and / or having hundreds of thousands of small cell base stations using high band spectrum. For pure mobility, an extensive macrocellular network using high voltage transmitters in lower and longer ranges is ideal. This requires a network of power towers, but each tower is capable of servicing tens of thousands of units each, rather than several dozen or hundreds of customers per small cell antenna.

  cell tower network

Since consumers need both speed and mobility, and neither player is able to satisfy both of these needs, a mix of different technologies – including macro cell services – will continue to be used for to meet the growing demand for data connectivity. It is important to note that both AMT and SBAC have significant international operations, while CCI is a pure-play US operator. AMT and SBAC focus on macro towers, while the CCI has made significant investments in fiber and small cell services in addition to their primary tower.

Bull & Bear Thesis for Cell Tower REITs

Our research continues to indicate that the macrocell towers provide the most economical mix of coverage and capacity, and the recent challenges of tight networking of small cells have confirmed our belief that power towers Will continue to be the "hub" for the next generation network in the foreseeable future. While communication technology is changing very rapidly, it appears that the physical and economic constraints of alternative technologies (low bypass satellites, broad cell small cells and outdoor Wifi) will not diminish at any time and the risk of technological deterioration in the 5G era is often exaggerated.

  5G vs 4G Cell tower REITs continues to steer strong competitive position in the telecommunications sector. Mobile operators sold their tower values ​​that began in the mid-2000s to deliver the balance and release the capital to expand their networks. Supply growth is almost non-existent in the United States, as there are significant barriers to entry through the local licensing process. The relative lack of cell towers combined with the absolute necessity of these towers for the cellular network has given these REITs considerable pricing power. While cell carriers have attempted to make influence over tower owners by building or acquiring the towers themselves, carriers have limited available capital to spend on these measures, especially in light of the capital-intensive 5G deployment.

<img src = "https://static.seekingalpha.com/uploads/2019/4/1723581_15559487666581_rId16_thumb.jpg" alt = "bullish cell tower [19659018] However, the four-year high performance race has pushed REIT valuations to elevated level compared to the rest of the real estate industry, while the country under cell towers is of course worth little without a functioning macro cell site, although we do not believe there is an immediate risk of technological deterioration, it is impossible to predict technological innovation for a decade, much less than decades Furthermore, there are only four major players in the US transport industry (and potentially three if the Sprint / T-Mobile merger is approved) and limit the number of potential tenants for these REITs, and carriers are incentivized to invest capital in alternative technologies such as small cells. and DAS to try to reduce the competitive position of the cell towers, perhaps the most important risk being related to the fact that these REITs own only 30% of the country Under their structures, the others rent 70% through (typically long-term) leases.

  BASIC cell tower 2019

Potential outcome of Sprint / T-Mobile Deal

The REIT industry in the cell tower continues to await the outcome of the Sprint / T-Mobile merger, which has the potential to change the competitiveness of the telecommunications area. Earlier this year, third and fourth largest US wireless operators announced a long-awaited merger agreement that would consolidate the industry into three nearly equal competitors alongside AT&T (NYSE: T) and Verizon (NYSE: VZ). The following year of discussions and a failed attempt at a merger in 2014 blocked by US regulators, the two companies eventually took the potential $ 26 billion deal. The combined device will control about 35% of total wireless wireless connections, including 25% of downstream subscribers and nearly 60% of prepaid phone subscribers.

While revenues from Sprint (NYSE: S) and T-Mobile (NASDAQ): TMUS) consist of a combined 26% of total industrial revenue, the "overlap" between Sprint and T-Mobile cell towers is about 4% of total industry revenues. This 4% represents a "worst case scenario" where T-Mobile completely knocks down the Sprint network on redundant towers and no longer needs to upgrade the equipment to handle the increased capacity. Crown Castle, which is US-focused, will be most affected, while the American Tower, which has a significant international presence, would be relatively unharmed.

Last week, the Wall Street Journal reported that the Ministry of Justice informed T-Mobile and Sprint that the deal is "unlikely to be approved as currently structured." The general consensus among analysts is that the betting odds are now reduced from over 75% late last year to below 50% currently. As we discussed during our last update, we believe that the merger approval is likely to depend on the regulator's assessment of the probability and forecast of four major unknown factors, ranked in order of importance.

1) Can Sprint Survive Without Merger?
2) Would Sprint have other suitors (cable companies, technology companies)?
3) Would a merger help or damage the growth of 5G?
4) Is wireless broadband a competitor to home banking providers?

Due to the uncertain answers to these four questions and a wide range of permutations of possible outcomes, analysts are generally divided on whether cell tower REIT investors should roam for or against the potential merger. Our assessment is that cell tower REITs will ultimately benefit from a non-outcome, but that downside risk is more significant if Sprint were to fail as a result. We outline our assessment through an analysis of the three possible outcomes.

Scenario 1: Merger approved

The mobile carrier industry will be consolidated into three players of about the same size. With more balance capacity, the merged T-Mobile would probably ramp up network spending in line with Verizon and AT & T, which would translate into an immediate boost to CELL TORN REIT revenue. With a smaller competitor, the 5G rollout starts faster, but is focused on high-value markets, and consumer prices are likely to be less competitive and translate into higher margins for operators, but potentially burn additional network investments. Over time, however, the competition position of cell tower REITs will be reduced. Carrier initiatives to leverage cell tower REITs, including building their own towers or taking over REITs leases, will be progressively more successful and growth will moderate, but remain above inflation levels due to continued favorable competition tower cell REITs.

Probability: 50%. For Cell Tower REITs: Decent / Default Outcome.

Scenario 2: Merger rejected. Sprint finds third-party partner

The merger is being rejected, but Sprint's underpriced and valuable network and spectrum opportunities are attractive to cable broadband providers (Comcast (NASDAQ: CMCSA), Charter Altice) who recognize the mounting and legitimate threat of 5G fixed wireless broadband, which we believe Be underappreciated by the market. Alternatively, a cash-flush technology company (Amazon (NASDAQ: AMZN), Google (NASDAQ: GOOG) (NASDAQ: GOOGL) or Microsoft (NASDAQ: MSFT) sees the properties as a subordinate compliment to their existing data center infrastructure and a new distribution source to reduce Competitive threats from established broadband providers, Sprint is able to leverage this partnership to become a legitimate competitor in space, and meanwhile, T-Mobile continues its strong lead in adding customers at sector-leading prices. -Mobile and Sprint close behind and consumer pricing remains intense.The four carriers are struggling to become leaders in 5G and access is widespread, initiatives to gain influence over cell towers REITs are largely unsuccessful, and price strength remains strong

Probability 35% For Cell Tower REITs: Best Outcome .

Scenario 3: Merger Sprint Fails

The merger is being rejected Sprint cannot find a suitable partner. Sprint's investors, including SoftBank (OTCPK: SFTBY), are reducing their investment and the network is falling further behind the three other carriers, and continues to lose customers until they can no longer operate. In bankruptcy, Sprint's assets are distributed around the telecommunications sector, including AT&T and Verizon, which further strengthen its grip on the new duopoly. T-Mobile's strong performance race slows down and cannot keep up with the network expenses of the two major players without Sprint's complementary resource. The carrier industry becomes a de facto duopoly and the REIT competition positioning of the tower is significantly reduced. Consumer prices are significantly less competitive, and the 5G rollout continues, but is only isolated to the most high-margin deployments. Carrier Initiatives to Acquire Towers REITs are largely successful and the industry is becoming more closely related to the REIT sector data center in recent years, with internal inflation rates and weak pricing power over increasingly dominant tenants.

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

Newer Cell Tower REIT Fundamental Performance

2018 was another strong year for the cell tower sector as the early effects of network plugging into fuel 5G networks driven by trend organic growth. Organic tower revenue, effectively the same-sized NOI equivalent, continues to grow at a sector-leading 6% + rate, as carriers continue to invest heavily in network densification and equipment upgrades. With the high operational implementation that comes with the co-location model, Tower REIT's enhanced benefits see increased network costs.

  REIT AFFO cell tower

These REITs forecast an average 8% increase in AFFO per share in 2019, among the strongest growth levels in the real estate industry. Along with robust organic growth, external growth through strategic acquisitions remains a central focus on cell tower REITs, supported by the cost of capital gains that these companies have had. As we will discuss briefly, the cell tower trades REITs with an estimated 30-50% premium for private market-induced net assets, which means that external acquisitions, albeit somewhat limited, can easily increase earnings.

<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 continued external growth resulted in an increase of 16% in total property revenue in 2018, rising from the 13% rate achieved in 2017, augmented by the effect of Crown Castle merger with the Lightower small cell operator, while appearing to be highly conservative, these REITs offer guidance that makes up a 5 % increase in property revenue in 2019.

Carrying capacity and capital expenditure

Cell tower REITs are relentlessly linked to the underlying performance of their mobile operators, which delivered another very strong year, AT&T, Verizon, T-Mobile and Sprint combined for Adding more than 4.5 million pay-as-you-go wireless customers in 2018, a sharp increase from the $ 3.8 million added in 2017, and the strongest year ever for cellular providers. clever as the customers effectively see a 3% decrease in their phone bills.

  pricing of mobile operators

Capital expenditure from mobile operators is an important driver of growth for tower REITs. Capex among US airlines had been lull over the past two years, so much of the available capital has been set against spectrum purchases that will drive the next-generation 5G network. Capital expenditures are expected to rise again, as the carriers begin distributing 5G networks over the next five to ten years.

  Network Expense Cell

New and Long-Term Stock Performance

Since NAREIT began tracking the sector in 2012, the REIT towers have surpassed the REIT index every year in addition to 2014. Cell towers remain one of the few remaining growth engines in the REIT sector, and considering the positive operating environment forecast for 2018-2020,

  REIT sectors

The good times have continued for the REIT sector this year, despite the merger uncertainties. The Hoya Capital Cell Tower REIT index has increased more than 19% this year compared to a 14% gain in the broader REIT index. Recurring interest rates and signs of moderate global growth have lifted REIT valuations across the sector after the worst year since the recession.   REIT performacne cell tower The American Tower has been leading the way for the past two years, followed by SBA Communications. Investors remain somewhat skeptical about the financial returns of Crown Castles significant investment in fiber and small cells over the past few years, explaining some of the underperformance since 2016.

  REIT inventory

Cell Tower REITs ” data-width=”640″ data-height=”148″ data-og-image-twitter_small_card=”false” data-og-image-twitter_large_card=”false” data-og-image-twitter_image_post=”false” data-og-image-msn=”false” data-og-image-facebook=”false” data-og-image-google_news=”false” data-og-image-google_plus=”false” data-og-image-linkdin=”false”/>

Cell Tower REITs [19659055] Strong performance over the past four years has pushed REIT valuations to the most expensive end of the real estate industry. The cell towers deal with a substantial free cash flow premium (aka AFFO, FAD, CAD) to the REIT average, but after calculating sector-leading expected growth levels, Celtower REITs are quite attractive on the basis of FCF / G metric. As mentioned above, cell towers are trading REITs at some of the largest real estate premiums in the real estate industry, giving these companies the "cheap" equity to drive further external growth.

  Cell Tower REIT Valuation

Cell Tower REIT Dividend Dividend

Cell Tower REITs are among the lowest current REIT sectors, and pay only 53% of their free cash flow and instead of plowing that capital back into business for to increase external growth. The sector pays an average dividend of 2.2%, among the lowest among REITs.

  REIT dividend yield cell tower

Within the sector, only Crown Castle acts as a typical REIT in terms of distribution. CCI pays a healthy 3.7% dividend yield, while AMT pays 1.9% and SBAC does not yet pay dividends.

  Cell tower replacement

Cell tower REITs and interest rates

Cell tower REITs happen to the "growth" side of the real estate industry, responding more to expectations of economic growth than interest rate changes. Among US REIT sectors, the cell towers are the third least-interest-sensitive sector and can balance an otherwise-sensitive REIT portfolio.

  REIT's interest

Within the sector, AMT and SBAC are classified as Growth REITs. CCI, which pays a 4% yield, is a Hybrid REIT and has properties that are more aligned with REIT averages.

  Interest REITs Bottom Line: Wireless Broadband is 5Gs Killer App [19659070] With 5G on the horizon, Cell Tower REITs have surpassed the broader real estate industry in each of the last four years. 5G technology will fundamentally interfere with the telecommunications industry. We believe that the true "killer app" for the 5G will be fixed wireless broadband internet, as dense small cells will allow operators to deliver fiber-like speeds without the wires.

The technological limitations of 5G – especially the small coverage area – mean that the macro towers will continue to be the primary hub of mobile networks. Network densification drives the revenue of the cell tower. Sprint / T-Mobile merger story continues. Just when an appointment appeared, a new curve ball emerged. We believe that Sprint's problems are overrated and that non-contractual outcomes will benefit Tower REITs.

The cell tower REITs continues to benefit from a favorable competitive position in the telecommunications sector. Low supply and high demand have turned into significant pricing power for cell tower operators. We analyzed the three potential merger outcomes and believe that a non-scenario would be the best scenario for these companies. However, this analysis is contingent on our view that wireless broadband really becomes the "killer app" to 5G, and that Sprint is a valuable partner or acquisition target from a third party (cable or technology) company as a result. [19659071] The risk of a non-contractual outcome is that the transport business turns into an efficient duopoly, which will translate into significant downward risk for the competition position of the REIT cell tower sector. The success of the early 5G wireless broadband tests in a handful of US cities will be closely monitored by all industry players, and Sprint's ultimate destiny may be based on relative success. If wireless broadband is actually the 5G "killer app" we think it might be, the future looks bright for cell tower REITs and carriers.

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Enlightenment: In I am long AMT, VNQ. I wrote this article myself, and it expresses my own opinions. I do not receive compensation for it (other than from Seeking Alpha). I have no business relationship with a company whose stock is mentioned in this article.

Additional information: It is not possible to invest directly in an index. The index results mentioned in this comment do not reflect the outcome of any fund or other account managed or served by Hoya Capital Real Estate. All comments published by Hoya Capital Real Estate are available free of charge and are for informational purposes only and are not intended as investment advice. Data cited represents past performance, which does not guarantee future results. The information presented is believed to be up-to-date and up to date, but we do not guarantee the accuracy.

Hoya Capital Real Estate advises an ETF. Real estate and homeowner definitions are available at HoyaCapital.com.

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