Three Cell Tower Companies Become the Hottest Play in Real Estate
February 18 2020 - 7:29AM
Dow Jones News
By Esther Fung
Cell towers, often considered a neighborhood eyesore in the
minds of the public, look like money these days to real-estate
investors.
Owners of cell towers lease space to wireless carriers like
AT&T Inc. and T-Mobile US Inc. so they can broadcast and pick
up signals from cellphones and other devices.
Cell-tower owners have been among the fastest-growing companies
in the real estate investment trust sector, as consumers use more
data through mobile phones and tablets than ever before.
With carriers and the federal government poised to make more
investments as 5G networks begin to roll out this year, the value
of these towers is expected to rise. The promise of self-driving
cars offers additional upside in the future.
"Cell towers are going to be extraordinarily important" for
self-driving vehicles, said Jason Yablon, senior portfolio manager
at Cohen & Steers, a large U.S. REIT investor.
The three publicly listed cell-tower companies all rallied last
week after a federal judge cleared the merger of mobile carriers
T-Mobile and Sprint Corp. Shares of American Tower Corp., Crown
Castle International Corp. and SBA Communications Corp. each gained
more than 4% on Feb. 11, the day of the judge's ruling.
Despite some earlier concern that moving from four major
carriers to three could cut rental revenue paid by cell companies,
analysts said that a stronger combined company would be a better
tenant for the REITs. The emergence of a fourth carrier, Dish
Network Corp., could also help offset any drop in demand.
"Investors originally asked whether this was going to hurt the
tower REITs, but it later became how much would the downside be if
the deal didn't go through," said Parker Rhea, senior analyst at
Jaguar Listed Property, a real-estate investment adviser.
The three cell-tower companies have become among the biggest in
the REIT sector -- larger than even the biggest office or apartment
REITs by market capitalization -- after a big rally.
Over the past three years, Crown Castle's share price rose about
80% while the shares of American Tower and SBA have doubled in
price. By comparison, the FTSE Nareit All REITs index gained 23%
over that period.
What is giving some investors pause is whether these companies
have grown too fast over a short period, raising the prospect that
their shares could suffer a correction or bouts of volatility.
"'What is the right valuation?' is a debate that we have," said
Cohen & Steers' Mr. Yablon, adding that multiples have
risen.
Cell tower dividend yields, ranging from 0.5% to 3%, are also
modest compared with other types of REITs. The dividend yield of
the FTSE Nareit All REITs Index reached 4% at the end of 2019.
But cell-tower yields have been growing. American Tower, the
world's biggest REIT by market capitalization at $114 billion, has
issued one of the fattest dividend growth rates, rising by at least
20% each year since 2013. It surpassed Simon Property Group as the
largest REIT in 2017.
REIT investors don't typically favor sectors with few companies,
but the three cell-tower owners collectively own around two-thirds
of the bigger towers in the U.S. That means any new competitor
faces significant barriers to entry.
"You and I could move into the apartment business, but how do we
get 40,000 towers?" said Burl East, chief executive officer at
American Assets Capital Advisers, a real-estate investment firm.
"There are structural impediments that hinder new companies from
coming in."
Many of these towers were built by the carriers themselves
decades ago and were then sold to these REITs on a sale-leaseback
basis.
Some investors say they like how cell-tower leases typically run
for 10 years with options for renewal. The leases have clauses that
allow for an average annual lease increase of 3% to 4%, an
attractive rate for the landlords, said Dilara Sukhov, an analyst
at Moody's Investors Service.
These landlords could also benefit from regulatory moves at the
state level. The wildfires in California have prompted regulators
to push cellular companies to add backup power at cell towers after
residents lost wireless access to emergency services in
October.
Write to Esther Fung at esther.fung@wsj.com
(END) Dow Jones Newswires
February 18, 2020 07:14 ET (12:14 GMT)
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