CCI: Activist Update and Potential Changes
Elliott Investment Management is serving as an activist. I am strongly in support of their proposals. While Elliott strongly criticizes management, they are a major shareholder.
My calculations implied CCI’s returns on capital expenditures were lower than the yields management emphasized. CCI did not respond. Elliott’s presentation supports that belief.
Capital expenditures to build fiber created a significant drag on CCI’s valuation and performance. Continuing this path would put the dividend in jeopardy.
CCI’s board amended the bylaws in 2021. We find the bylaws to be anti-shareholder. Elliott suggests that they violate Delaware law by hurting shareholders.
Recent valuation gains may reflect a plunge in rates and Elliott’s announcement. I may consider reallocating part of my position.
Activist
Elliot Investment Management (henceforth Elliot) is pushing for change.
Brief history:
Elliot controlled over $1 billion of shares in 2020 and pushed for change.
Elliot’s campaign in 2020: Reclaiming the Crown.
Some modest changes were implemented, but not much.
Today, Elliot controls more than $2 billion of CCI (between 4% and 5% of common shares) and sent a new letter to management. Because of the lower share price, $2 billion represents a much larger position.
Elliot’s new campaign in 2023: Restoring the Castle.
I am strongly in agreement with Elliot’s recommendations and believe adopting them would lead to much better returns. It is time to restore the castle.
2020 Events
Letters:
July 6, 2020: Elliott’s first letter
July 20, 2020: Elliott’s second letter
August 17, 2020: Elliott’s third letter
Press releases:
July 6, 2020: Elliott’s first press release
July 20, 2020: Elliott’s second press release
August 17, 2020: Elliott’s third press release
Presentations:
July 6, 2020: Reclaiming the Crown
Some modest changes were implemented, but far from the level Elliott was seeking.
For instance, on July 29, 2020, CCI announced they would refresh the board and “committing to review its executive compensation program”. Specifically, they did not commit to change, improve, or have competent guidance in reviewing the compensation plan.
CCI subsequently amended the bylaws (in 2021). I believe the changes were “aggressively anti-shareholder”.
2023 Events
Leaks:
November 26, 2023: Elliott’s plan to speak with CCI was leaked.
Letters:
November 27, 2023: Elliott’s first letter for 2023
November 28, 2023: Elliott’s second letter for 2023 (not yet available outside press release)
Press releases:
November 27, 2023: Elliott’s first press release for 2023
November 28, 2023: Elliott’s second press release for 2023 (contains second letter).
Presentations:
November 27, 2023: Restoring the Castle
What changes will be achieved remains to be seen.
CCI responded by issuing a press release of platitudes.
3 Tower REITs
There are 3 tower REITs:
Crown Castle International (CCI)
American Tower (AMT)
SBA Communications (SBAC)
Note: I am long all 3.
Elliott is taking aim at CCI because poor decisions on capital expenditures resulted in weaker performance. Elliott hopes to drive change in those decisions, which could result in a revaluation of the shares.
A Shareholder
Keep in mind that Elliott is not shorting the stock. Their fund owns over $2 billion in CCI. Given the rally the last few days, it should be higher now. As of the end of Q3 2023, Elliott had $59.2 billion in assets under management. Consequently, $2 billion is still a material position. They have an incentive to encourage management to make positive changes. While they are attacking the capital expenditures on fiber, they still see a valuable investment in the towers and the potential for CCI to improve returns by changing their strategy.
My View
I’ve been working on tower REIT modeling for quite a while. One of the challenges I had was trying to get satisfactory modeling on CCI’s developments. I reached out to management, but there was no reply. As Elliott highlighted years ago, CCI has been reluctant (refused) to provide the transparency analysts want for better modeling.
Due to the lack of that data, modeling goes much slower. Specifically, one of the biggest challenges was reconciling between management’s stated yields on assets and the growth rate in NOI (Net Operating Income) by segment. Simply put, the yields they referenced and the actual numbers achieved and in guidance (issued by management!) did not align with those yields.
Elliott argues very effectively that the yield on capex in fiber is simply much lower than management has indicated. That’s the same conclusion I was reaching in my modeling and the reason I reached out to management to ask for clarification.
Consequently, there is a simple path to dramatically improved returns for CCI:
Demand a much higher return on investment.
Dramatically reduce fiber investments (few will meet a proper return threshold).
Here is the situation today:
CCI pays out the substantial majority of cash flow in dividends. That’s okay because towers provide steady growth. CCI’s tower portfolio is excellent.
Fiber investment is funded using debt. I prefer to see REITs looking to gradually reduce leverage in this higher interest rate environment.
The return on fiber capex is less than the cost of debt. There are times when that’s okay for capital expenditures, but it’s pretty rare. This is not it.
Fiber is Driving Down the Multiple
One natural way to value REIT is to use the dividend yield plus the growth rate.
Alternatively, we can use the AFFO yield plus the growth rate (requires evaluating payout ratios).
In theory, these methods should produce accurate valuations.