Tower REIT Update
Big performance in prior years. Bad lately. Rates are bad. Floating-rate debt caused the hit to AFFO to show up faster.
The increase in rates leading into 2024 isn’t as bad. It’s still a headwind, but it’s materially smaller.
Near-term debt also creates a modest headwind, but it still isn’t as bad as 2023.
Elevated rates give investors more opportunities for investing, which drives most targets lower.
CCI’s decisions resulted in the risk rating increasing from 2.5 to 3.0. Targets for all 3 REITs are updated. Activist activity will be in the next article. Coming soon.
After tower REITs thoroughly beat the REIT index for many years, they got rocked since the end of 2021.
The 3 tower REITs:
American Tower (AMT)
Crown Castle International (CCI)
SBA Communications (SBAC)
All equity REITs benefited from cheap debt over prior decade. Rates roaring higher put pressure on REITs from multiple directions. Interest expense was impacted 3 ways:
Rising interest expense on floating-rate debt.
Rising interest expense from refinancing maturing debt.
Rising interest expense on new debts.
Valuation also suffered:
Higher interest expense pressures AFFO growth rates, which hurts dividend growth rates.
Higher yields on bonds made dividend yields less attractive. This causes dividend yields and AFFO yields to rise as prices fall.
Higher yields on debt pushed cap rates higher as financing real estate became more difficult. That pushes NAV (Net Asset Values) lower.
Lower share prices made accretive acquisitions more difficult. This negatively impacts REITs that seek to issue equity for acquisitions.
The tower REITs, once the darling of most investors for their rapid growth in AFFO per share, saw valuations hammered.
Was it just because AFFO per share growth was weak in 2023? No, but that’s probably a big factor.
Evaluating Tower REITs
Tower REITs are among the more complex REITs to analyze.
There are 3 reasons that stand out:
Volatility in overhead expenses relative to revenue.
Frequent acquisitions and development.
Diversification within the portfolio.
Types of diversification:
For AMT and SBAC, the diversification is international.
For CCI, the diversification is into fiber and small cells.
The Impact of Rising Rates
Investors may hear quite a bit about how rising interest rates are hurting AFFO. I want to clarify two things many investors get wrong:
Many investors may still underestimate the magnitude of the impact in 2023.
Many investors may inaccurately believe that this is going to happen again.
Tower REITs had more floating rate debt (vs. total debt) than many other types of equity REITs. They took a big upfront hit to AFFO per share.
It was a huge hit.
Sorry, not like that. It was the kind of hit you don’t want.
Yeah, it felt like that.
Allow me to quantify the impact using numbers for CCI. Part of CCI’s debt comes through a revolver (floating rate, can borrow or pay down).