Tower REIT Notes from CCI’s Latest Conferences

The Tower REITs are headed to conferences to tell analysts why the business is still growing. Several presentations have already been made. I’m pulling a few of my favorite highlights for discussion.

Rent Is The Biggest Factor

I believe the most important factor for most equity REITs (real estate owners) over the long term is rent. The factors that can overpower rent are generally easy for us to screen:

1. Stupid amount of leverage. Don’t buy those REITs.

2. Bad external manager (most external is bad). Don’t buy those REITs.

3. History of stupid decisions. It's harder to catch (depending on how many bad decisions), but the goal is to not buy those REITs.

If we’ve filtered those out, then rent should be the biggest factor to drive FFO and AFFO per share over long periods. In short periods, a rapid change in interest rates or major macroeconomic events (tenants not paying rent during the pandemic) can swing FFO or AFFO wildly for a year or two.

Consequently, the single largest factor for driving growth is usually revenue. This shouldn’t be all that surprising. Improving margins helps, but they can only improve so far. Consequently, I’ll be focused on factors that should impact revenue.

We’re going to focus on Crown Castle International (CCI) in this article, but the commentary on the industry is extremely relevant to American Tower (AMT) and SBA Communications (SBAC). I’ll be using screenshots from the transcripts at Seeking Alpha.

CCI at Goldman Sachs

Jay Brown, CEO of CCI, presented at the Goldman Sachs event.

The first quote I want to bring up relates to the use case for 5G. Jay Brown described his expectation for industrial use cases to drive higher data:

The next factor is that carriers are still throwing cash into building networks. They just aren’t doing it in the most efficient manner:

It might seem crazy to suggest that carriers with market capitalizations greater than $100 billion are not allocating their capital in the most efficient manner. However, the last 20 years of returns for Verizon (VZ) and AT&T (T) suggest that decisions were often far less than perfect.

Of course, CCI has three types of assets:

1. Towers

2. Small Cells

3. Fiber

Small Cells and Fiber are occasionally clumped together as a single segment because small cells depend on fiber. The fiber represents 85% of the cost of deployment for small cells. Consequently, adding small cells requires a smaller investment if the fiber is in place. However, the fiber installation is still a significant upfront cost.