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Three REITs to Call up 5G
09/26/2019 5:00 am EST
There is a revolution going on. You’ve probably heard the term 5G technology. It is the latest, or “fifth generation,” of cellular wireless technology just starting to be rolled out, notes industry-leading income specialist Tom Hutchinson, editor of Cabot Dividend Investor.
But it’s much more than just an incremental generational cell phone advancement. It will thrust the world into a new age. And three 5G technology REITs intend to capitalize. More on those in a bit.
A new generation rolls around every 10 years or so, from the first one that enabled cell phones in the first place to the third and fourth generations that enabled smartphones and mobile data.
Each generation marks an improvement in speed and latency, the amount of time it takes devices to communicate with each other. This generation is projected to feature internet connectivity with far superior speed, scope and scale.
The implications go well beyond phones. It is a crucial tipping point of critical mass: 5G enables virtually instantaneous internet connectivity, providing the technology for a new range of advancements like self-driving cars, robotics, artificial intelligence, smart cities and much more.
Until now, the digital age was like a dirt road. It’s now about to become a 10-lane highway with speed rails and air traffic. You ain’t seen nothin’ yet!
How important is it? It is such a game changer that it is considered a national security imperative. It is a big part of the current trade war with China and the struggle for dominance and power.
The U.S. National Security Council has warned that if China gets 5G first it “will win economically and militarily.” In fact, 5G technology is considered so crucial that the FCC streamlined the rules so that the 5G rollout can continue in haste.
5G is infrastructure. Every new generation requires more and better cell towers and supporting structures. This new generation requires even more because, although it provides great speeds and power, it doesn’t have the cell signal range of previous generations. Therefore, it requires more towers and supporting technologies to increase the range and relieve congestion.
Aside from the major cell phone providers, there are three big players in 5G technology, and they’re all REITs (Real Estate Investment Trusts).
It’s a business that provides both growth, with the 5G rollout, and defense, as the rollout will continue rain or shine, in a good economy or a bad one. Right now, these three 5G technology REITs are an incredible opportunity for income investors.
American Tower Corp. (AMT)
American Tower is the largest U.S. cellular infrastructure REIT. It owns and operates 170,000 cell towers, 41,000 in the U.S. and 130,000 abroad, primarily in India and Brazil. And it’s growing. It added 20,000 cell towers in 2018. It leases these towers to cellular service providers under long-term contracts, acting as a mobile technology landlord.
Business is good. The stock has blown away both the returns of the overall market as well as its REIT peers. AMT has provided a better than 21% average annual return over the past 10 years. It is benefitting in the U.S. from the voracious anticipation for the 5G rollout as well as in emerging markets, as low-cost smartphones proliferate at a torrid pace.
Lately, the returns are accelerating. The stock has gained 49% over the past year and 40% year to date. Revenues and earnings continue to grow with no end in sight and this market has noticed.
The biggest drawback is that AMT isn’t cheap and it only pays a 1.55% yield. That said, it is forecasted to grow earnings at a better than 21% annual clip over the next five years. That’s serious growth for a REIT.
It is also worth noting the defensive nature of this growth business. Even during the financial crisis year of 2008, AMT still grew revenues at 8%.
SBA Communications Corp. (SBA)
SBA is the smallest of the cellular infrastructure REITs with about 30,000 cell towers in North, Central and South America. It has a huge presence in Brazil but generates about three quarters of revenue in the good ole USA.
It has essentially the same business model as AMT in that it leases space on its towers to cellular service providers under long-term contracts. The key differentiating point is size, which is both a blessing and a curse.
As part of their 2Q19 results release, the Company’s Board of Directors declared its first cash dividend of $0.37 per share of Class A common stock, payable September 25, 2019, to shareholders of record on August 28, 2019. Smaller companies can grow faster and SBA has past returns that are even better than those of AMT. While AMT is forecasted to grow earnings better than 20% over the next five years, SBA is projected to grow at a better than 80% annual clip. It’s really a growth stock disguised as a REIT. But it’s in the right place at the right time.
Crown Castle International Corp. (CCI)
Crown Castle International Corp. leases a portfolio of properties that currently includes 40,000 cell towers, 65,000 small cell towers and 70,000 miles of fiber optic cable primarily to the four largest wireless service providers in the U.S.
It has the same basic business model as the other two, but I like this one best for several reasons. For one, it actually pays a decent dividend, currently a 3.56% yield. Another reason is that it operates exclusively in the U.S. The 5G story is so good that I don’t want to risk any crazy emerging market shenanigans messing things up. But perhaps the most important advantage is the small cells.
The current 5G buildout plays right into Crown Castle’s hands. Although speed and latency will improve by staggering amounts, this generation lacks something previous ones had — range.
A 5G signal only travels about half a mile, compared to several miles for earlier generations. That means that small cell towers will be required all over the place in order to increase the range and relieve congestion.
Crown Castle is the small tower king. Small towers are about the size of a pizza box, and will soon decorate almost every street corner. AT&T claims that 300,000 new small towers will be needed for 5G. Only 220,000 currently exist.
Crown Castle already owns 65,000 (more than any other company in the country) and has recently signed multibillion dollar contracts with the four largest cell providers (Verizon, AT&T, Sprint and T-Mobile) to provide more.
Crown Castle built 7,000 small towers is 2018 and it will put up an estimated 15,000 more this year. By some estimates, the infrastructure REIT will have 240,000 such towers by 2025.
CCI is also projected to have robust earnings growth, unusual for a REIT, over the next five years. While the upside potential of this REIT is probably less than the other two, it’s a more stable performer. The growth is there but it also offers more downside protection if the market turns south.
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