Crown Castle: Cell Towers Drive Income

05/25/2015 8:00 am EST

Focus: REITS

Harry Domash

Publisher, DividendDetective and Winning Investing

Real Estate Investment Trusts are a popular investment choice for investors seeking a steady income stream, suggests Harry Domash, editor of Dividend Detective.

However, most REITs operate in slow growth business sectors such as shopping centers and commercial office buildings.

By contrast, Crown Castle International (CCI), a recent addition to Dividend Detective’s REIT portfolio, owns and operates cell phone towers and other equipment for handling cell phone communications.

Spurred by the mushrooming use of wireless devices such as smartphones and tablets to view videos, wireless communications is a fast growing business. With 40,000 towers, CCI is one of the largest players in the US.

Crown Castle, which converted to a REIT last year, pays a 3.9% dividend yield compared to 1.8% and 0%, respectively, for competitors American Tower (AMT) and SBA Communications (SBAC).

Crown Castle generally leases transmission tower space under five to 15 year contracts with pre-determined rental increases.

While CCI is growing revenues and cash flow by building new towers and adding equipment and increasing rents on existing towers, its aggressive expansion into the small cell market offers the most interesting growth opportunities.

Small cells are used to connect mobile device users to wireless carrier networks in dense usage areas such as shopping malls, universities, sports stadiums, etc. CCI’s March quarter small cell revenues rose 35% vs. year-ago, accounting for 7% of total revenues.

Small cell networks connect to wireless networks via fiber optic cables. In April, CCI, which already owned or had rights to about 7,000 miles of fiber, agreed to pay $1.0 billion to acquire an additional 10,000 miles of cable in major metropolitan areas, opening up significant additional growth opportunities.

Consistent with its strategy to focus on US operations, In May, Crown Castle agreed to sell its Australian unit for $1.6 billion in cash.

Crown Castle reported March quarter FFO (adjusted) of $1.15 per share, $0.06 above analyst forecasts and up 10% vs. the year-ago quarter. Revenues rose 7% to $941.00 million. Site rental revenues rose 3% to $767.7 million and network services revenues grew 35% to $173.4 million.

Operating cash flow rose 27% to $460.794 million. In its previous quarter, Crown Castle reported 14% December quarter year-over-year FFO growth on a 21% gain in revenues.

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