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Crown Castle: Tower of Opportunity
11/02/2015 8:00 am EST
The wireless tower industry provides access to fantastic cash flow and exposure to exploding wireless data demand, explains Josh Peters, analyst with Morningstar DividendInvestor.
Long-term contracts and high switching costs provide a solid base of future business. At the same time, we don’t believe wireless carriers can escape the need to build denser cell site grids to add data capacity.
Despite a short dividend history and a bit of technological risk, Crown Castle International (CCI) offers a lot of appeal.
Crown Castle has focused all of its energy on the US market, recently agreeing to sell its Australian business.
While Crown lacks the international growth potential of its main rivals, we believe it has pulled together assets that will make it an especially indispensable partner for the US carriers.
Crown earns the vast majority of its revenue by leasing out space on communications towers it owns or otherwise controls.
Contracts with wireless carriers typically run ten years or longer and include annual rent escalators.
The majority of these wireless towers were acquired in chunks, primarily from the carriers themselves.
Tower firms can manage these assets more efficiently than the carriers, as independent ownership allows multiple carriers to locate on each structure without competitive concern.
The tower companies also possess management expertise that can be effectively leveraged across a far larger number of sites than a carrier could accomplish on its own.
Crown’s nearly exclusive focus on the US market has led it to types of assets its rivals have largely ignored.
The acquisition of NextG in 2012 pushed the firm heavily into the distributed antenna system and small-cell markets, while the purchase of Sunesys brought deep fiber assets in several markets.
We believe Crown is assembling a collection of assets that collectively will allow it to offer unique solutions to the carriers as it fills network gaps and adds coverage in high-traffic areas.
Crown’s 4.2% yield is relatively low compared with traditional triple-net lease REITs, but dividend growth boosts the potential total return range to 10%–11% a year over the long run. As we assume a 9% cost of equity, we believe the shares are undervalued.
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