Tower REITs, Carriers, And Lead-Sheathed Cables

Yesterday was a particularly rough day for AT&T (T) and Verizon (VZ) as further evidence regarding lead-sheathed cables comes to light. T-Mobile (TMUS) is doing much better since they don’t own the toxic assets (sorry, that pun was begging to be used). 

The damage is also weighing on prices for the 3 cell tower REITs: American Tower (AMT), Crown Castle International (CCI), and SBA Communications (SBAC).

Note: As of Tuesday, 7/18/2023, just past noon Eastern, we have the following changes on the day: VZ is up 3.8%. T and TMUS are roughly flat. AMT is down about 2%. CCI and SBAC are roughly flat. 

A Brief Summary

WSJ (Wall Street Journal) prepared some (paywalled) outstanding journalism.

• WSJ tested for lead around older lead-sheathed cables. 

• High lead was strongly linked to old lead-sheathed cables. Correlation established.

• Further testing indicated that the lead near the cables most likely originated from the cables. Causation established.

Some analysts suggested that the total cost to clean up the mess could be around $60 billion. They believe it is unlikely the carriers would actually be forced to pay most of it. Take the number loosely. I cannot vouch for or against the quality of their work.

In addition to T and VZ, they identified “Lumen” as having significant exposure. Is that Lumen Technologies (LUMN)? That’s my guess, but it wasn’t explicit.

Why It Matters For Cell Tower REITs

Poor management at VZ and T drove poor capital allocation decisions. The carriers might choose to reduce capital expenditures. Whether they actually pay for the cleanup or not, this would be an excuse for reducing capital expenditures. 

How would that play out for the financial results at the REITs?

It would reduce the organic leasing revenue growth rate.

That would show up as a reduction in same-property revenue, which would hit same-property NOI, then EBITDA, then FFO and AFFO per share. Consequently, the projected bounce for AFFO per share growth rates in 2024 could be smaller than previously projected.

However, investors absolutely shouldn’t blow this out of proportion.

2023 Guidance

Due to some non-recurring charges and the spike in interest expense on floating-rate debt, 2023’s growth rates were unusually low. Remember, this is about growth rates. Not absolute values.

Official AFFO per share guidance ranges for the REITs were significantly impacted by interest expense and non-recurring factors:

Note: This chart uses the initial 2023 guidance. Adjustments to guidance were small.

If we normalized for all non-recurring factors and stabilized interest rates, the growth rate would’ve been pretty good. The underlying assets for AMT and SBAC were doing well. CCI was having a harder time leasing. 

Since 2023 includes much higher interest expense than 2022, it provides an easier base year going into 2024. However, rates have climbed quite a bit in 2023, so there will still be some interest expense headwind for AMT and CCI in 2024. Less than in 2023, but still some. 

CCI has larger headwinds for AFFO per share in 2024 and 2025 than AMT or SBAC, which leads to CCI having a lower AFFO multiple. 

Target Adjustments and Expected Trade