Ever thought about who owns those big, unsightly cell phone towers dotting our landscape?
The vast majority are owned by real estate investment trusts, or REITs, which are one of the main ways retail investors can get a piece of commercial real estate.
In periods of economic volatility and uncertainty, REITs, which own or finance income-producing real estate, can offer a slice of stability with steady returns and dividends for investors. REITs that rent infrastructure to cell phone and satellite TV companies—think big communications towers, for instance—are a fraction of the vast REITs universe.
Communication infrastructure REITs are underperforming today. But with the rise of 5G service and ever-changing and ever-growing technological demands, they can hold more promise than REITs that own other types of real estate in the long run.
“These are the core companies that make up everyday internet usage,” says Brandon Nispel, a communication services analyst with KeyBank.
There are a handful of public REITs that operate in this space, including Boston-based American Tower (ticker: AMT) , Boca Raton-based SBA Communications (SBAC), and Houston-based Crown Castle. (CCI). The three companies own the vast majority of some 150,000 cell towers in the United States.
Underpinning communications towers are their tenants, household-name companies such as T-Mobile, Verizon, AT&T, and DISH.
But it wasn’t always this way.
At first, wireless carriers built out networks of equipment on towers themselves. But this became too expensive.
“The tower companies were really started because they were divested by the carriers, because the carriers were looking to offload costs from their network build,” Nispel says. “That’s where towers came into play because then they became a shared-cost model, where in the past, Verizon would not be on the same tower as AT&T. Today and going forward, the way the towers make all their money is by co-locating multiple customers on a single structure.”
Like much of the stock market, public infrastructure REITs are down compared to last year. SBA Communications’s total returns, for instance, have dropped 14.4% from this time last year; American Tower fell almost 16%; and Crown Castle has dropped almost 22%, according to data compiled by Nareit, a REIT industry group.
As a group, total returns for infrastructure stocks are down more than 27% for the year through Dec. 5–performing worse than REITs overall, which are down nearly 23% this year in the same period, Nareit data shows.
Dividend yields for the four infrastructure REITs that make up the category average 2.96%, below the 3.77% average for FTSE Nareit All Equity REITs.
The overall trend is leading to higher rates of redemptions by investors in retail and institutional funds, according to the Wall Street Journal.
This marks a reversal from 2021, when REITs outperformed the broader market, posting total returns of 39.88% compared to 28.71% for the S&P 500. Meanwhile, infrastructure REITs posted total returns of 34.41% last year, according to Nareit.
High interest rates—which have climbed in the U.S. this past year—are raising the cost of debt and, as a result, have not been helpful to the industry
“Power companies are generally fairly acquisitive and have higher leverage [more debt] than some industries, meaning they’re interest-rate sensitive when they need to go refinance debt or issue debt to finance a transaction,” Nispel says.
Still, the sector has long-term advantages.
“It’s only been 15 years since the iPhone launched, which really started to enable us to utilize mobile communications to their fullest extent,” Nispel says. “We’re on the fifth generation of wireless technology, 5G, and these generations of technology generally take five to 10 years to build out. Then there is inevitably another generation of technology that makes the capabilities better and better.”
And this means competition, which can bode well for investors.
“They constantly need to invest to keep up with the latest and greatest technology,” Nispel says. “And if you fall behind your competitors, you generally start to lose market share.”
This is particularly true today, Nispel says. Major wireless carriers in 2021 invested US$35 billion in capital expenditures—a record, according to CTIA, an industry group for the U.S. wireless communications industry.
And as wireless carriers add more spectrum bands to towers to build out their 5G coverage, that means they need to upgrade their technology, which means they need to amend existing leases they hold with their infrastructure REIT owners.
“When customers amend leases, towers are generally capable of monetizing technology transitions,” Nispel says. This means infrastructure REITs can charge more or extend the duration of the lease.
But is fast growth always beneficial?
“The wireless carriers are generally trying to go as fast as possible. There are labor shortages in some markets, which can somewhat slow the pace of their deployment,” Nispel says. “If it slows the pace of deployment, that ultimately probably slows the pace of leasing growth for the towers.”
For the companies that lease the towers to these competitive, fast-growing wireless carriers, the question becomes: How much growth is really left?
“They’re big businesses that have compounded growth on top of growth for many years. And so it becomes a challenge with growing off of that massive base that they’ve already had,” Nispel says. “So from an expectation standpoint, what is the level of growth that investors can expect over a multiple-year period of time?”