Why Invest In A Cell Tower REIT? (2024)

Later this week, I will be writing on American Tower (AMT), a leading cell tower REITs with assets in excess of $21 billion and a market cap in excess of $40 billion. This will be my first article on this REIT and also the asset sector.

As a precursor, I decided that I would begin to research the cell tower sector in hopes of educating myself and the readers on Seeking Alpha. I sourced most of the data for this article on AMT's website and you can find it HERE.

As of January 1, 2012, AMT reorganized its business and began functioning as a REIT. Later (December 2014), Crown Castle International Corp. completed the merger with its wholly owned subsidiary, Crown Castle REIT (CCI) to commence operations as a REIT.

What is a Cell Tower?

A vertical structure built on a parcel of land, designed to accommodate multiple tenants. Cell tower tenants utilize many different technologies, including telephony, paging, mobile data, broadcast television and radio. Tenants lease vertical space on the tower and portions of the land underneath for their equipment.

What is found at the tower site?

The cell tower company typically owns or leases under a long-term contract: (A) Tower structure (B) Ground interest (fee simple or lease). The tenant typically owns and operates: Equipment, including antenna arrays, antennas, coaxial cables and base stations and equipment shelters.

Here is a snapshot of the types of towers:

Typical cell tower components include:

Here is a sample component ownership overview:

The Business Model

Cell tower revenues consist of the following sources:

1. Multiple tenants lease vertical space on the tower for their communications equipment
2. Rental charges are typically based on: Property location, leased vertical square footage on the tower, weight placed on tower from transmission equipment and backhaul solutions.

Long-term customer lease contracts are typically non-cancellable and the typical contract terms include an initial term of 10 years with multiple five-year renewal terms. Most contracts have annual lease escalators in the U.S. of approximately 3%, and escalations in international markets are typically based on local inflation rates. There are low historical annual churn rates of approximately 1-2%.

The US Operating Structure

Sources include:

› Ground rent

› Monitoring

› Insurance

Land Interest Attributes

› Own ~24% of land under our U.S. sites

› Approximately 63% of sites are on owned land or have a ground lease with at least 20 years until renewal

› Long-term leases: average remaining ground lease term is approximately 23 years until final maturity in the U.S.

› Annual lease escalators in the U.S. of approximately 3%

› Selectively purchasing land interests where return hurdles are met

Fixed Cost Structure of Towers

› Additional tenants result in minimal incremental operating costs

International Operating Cost Structure

The International cost structure is similar to the U.S. cost structure, but with ability to pass-through certain expenses to tenant

Sources

› Ground rent

› Monitoring

› Insurance

Land Interest Attributes

› Long-term leases: average remaining ground lease term is approximately ~12 years

› International escalators are typically based on local inflation indexes

Pass-Through

› Our international markets typically pass through a portion of their operating expenses to the tenant (e.g., ground rent, fuel costs)

Fixed Cost Structure of Towers

› Additional tenants result in minimal incremental operating costs

Low Ongoing Capital Requirements

Capital Expenditure Types

• Revenue-maintaining CAPEX:

Capital Improvements

› Includes spending on lighting systems, fence repairs and ground upkeep

› ~$400-$600 annually in our international markets and $1,200-$1,500 in the U.S.

› Corporate capital spending primarily on IT infrastructure

• Revenue-generating CAPEX:

Redevelopment

› Capital spending to increase capacity of towers (e.g., height extension, foundation strengthening, etc.)

› Cost is typically shared with the tenant, and investment payback period on net CAPEX is typically one to two years

Ground Lease Purchases

› Capital spending to purchase land under our sites

Discretionary Capital Projects

› Capital spending primarily for the construction of new communications sites and generators

Start-Up Capital Projects

› Expenditures that are specific to acquisitions and new market launches and that are contemplated in the business cases for these investments

U.S. new macro tower build economics drive strong ROI

International new tower build ROI typically exceeds U.S. returns

Technology Overview

The mobile call sequence

What is spectrum?

Spectrum: radio frequency airwaves, needed to transmit analog signals, including wireless communications signals.

Spectrum airwaves are licensed to carriers who utilize the spectrum to transmit wireless signals. The government typically regulates this spectrum and auctions it to wireless carriers for use. Spectrum is measured in units of "hertz" or Hz. The three main considerations in evaluating a carrier's spectrum position include:

1. In which spectrum bands does the carrier hold licenses?

2. How much spectrum (bandwidth) does the carrier have?

3. What type of technology is the carrier deploying on that band of spectrum (i.e. CDMA, HSPA, LTE)?

Spectrum Characteristics:

› Propagation - radio transmits a signal by driving a current on an antenna; signal propagates away from antenna as a wave at the speed of light

› Lower-frequency spectrum provides a larger coverage area and better in-building penetration ("beach front" spectrum)

› Higher-frequency spectrum covers shorter distances (need significantly more cell sites to get the same level of coverage)

› As spectrum usage increases, the distance spectrum can propagate decreases.

What is a cell site?

A cell site is an area within a carrier's wireless network which is serviced by an antenna array. Carriers commonly refer to these areas as "rings."

› Can be located on a tower or alternative structures, such as rooftops, water towers and church steeples

› One macro tower can support multiple carriers' cell sites through collocation

Narrowing cell radius

Network design evolution

Tower sites are preferable in most locations

Mobile networks uUse multiple technologies

Heterogeneous networks (HetNets)

Network deployments will consist of multiple layers - traditional macro cell towers provide a blanket of coverage, while underneath this umbrella, a combination of other technologies are deployed to increase network capacity, particularly in dense urban areas.

U.S. Demand Drivers

Carrier lease / build decision:

› Significant economic incentive exists for carriers to choose a collocation model over building their own site

› Significant time to market advantage from leasing space on an existing tower site

› Building a site may involve years of work to secure ground interests and zoning approvals

An example

› Present value of carrier network build-out alternatives

› Carrier Build Scenario

› $225,000 construction cost, $1,250 monthly operating expenses with 3% annual escalator, 9% Weighted Average Cost of Capital (WACC)

› Tower Lease Scenario

› $1,800 monthly lease with 3.5% annual escalator, 9% WACC

U.S. Wireless Industry Trends

Mobile network usage - handset and data estimates

4G adoption - projected growth (2014-2019)

U.S. rapid wireless data adoption

Network investment by U.S. carriers

4G technology migration continues

International Demand Drivers

Stages of global wireless market development

International wireless markets (diverse demand drivers):

International markets poised for smartphone growth

Conclusion: Now that we've covered the basics, I plan to write an article on AMT later this week. In addition, I will be including AMT and CCI in my Intelligent REIT Lab as part of my iREIT Investor research lab.

Source: AMT Website

Disclaimer: This article is intended to provide information to interested parties. As I have no knowledge of individual investor circ*mstances, goals, and/or portfolio concentration or diversification, readers are expected to complete their own due diligence before purchasing any stocks mentioned or recommended.

Brad Thomas

Brad Thomas has over 30 years of real estate investing experience and has acquired, developed, or brokered over $1B in commercial real estate transactions. He has been featured in Barron's, Bloomberg, Fox Business, and many other media outlets. He's the author of four books, including the latest, REITs For Dummies.

Brad, with his team of 10 analysts, runs the investing group iREIT® on Alpha, which covers REITs, BDCs, MLPs, Preferreds, and other income-oriented alternatives. The team of analysts has a combined 100+ years of experience and includes a former hedge fund manager, due diligence officer, portfolio manager, PhD, military veteran, and advisor to a former U.S. President. Learn more