Real estate investment trusts (REITs) are often thought of as mature real estate companies whose growth rates are more or less driven by the momentum of the overall economy. Apartment buildings, shopping malls and office complexes simply aren’t fast producers. Communication infrastructure, on the other hand, is growing due to increased use of mobile data, which is likely to continue for the foreseeable future.
Crown Castle International (CCI 1.92%) This is the beneficiary of the long-term trend, and that should translate into higher dividends down the road.
Crown Castle is a leading cellphone tower REIT
Crown Castle International is a cellphone tower REIT that operates over 40,000 towers primarily in the United States. In addition to towers, Crown Castle maintains approximately 115,000 small cell nodes and approximately 85,000 route miles of fiber. Crown Castle’s fiber business supports small cells, which amplify signals and increase capacity. The company is investing significantly in its fiber segment.
Crown Castle’s main business is leasing capacity to wireless carriers. The company’s largest tenant includes T Mobile, AT&TAnd Verizon Wireless. These three tenants account for around 75% of Crown Castle’s revenue. Crown Castle is one of the three largest cellphone REITs, with which it shares space American Tower (Amt 1.38%) And SBA Communications (SBAC 1.68%).
The overall cellphone tower industry is driven by the demand for mobile data, which is expected to grow at a CAGR of 21% between 2022 and 2028. The cellphone tower business is characterized by high barriers to entry, and in the United States, it is dominated by American Tower and Crown Castle.
Crown Castle has a long history of dividend growth
Crown Castle has a long history of dividend growth. Between 2017 and 2023, it has increased its annual dividend at a compounded average growth rate of about 9%. The company just raised its dividend and a 23% drop in stock price over the past year has helped push the dividend yield to 4.3%. It yields better than American Tower or SBA Communications.
Crown Castle management guided for 2022 funds from operations (AFFO) of $7.36 per share and for 2023 AFFO to increase 3.7% to $7.63 per share. REITs typically use funds from operations (or some variant) to describe earnings because net income under generally accepted accounting principles underestimates the cash flow generation capacity of these companies. This is because depreciation and amortization is a major expense for REITs.
However, this is not a cash charge. This means that net income is usually much lower than funds from operations. At current levels, Crown Castle International is trading at a price-to-AFFO ratio of 19.1, which is reasonable.
The Sprint/T-Mobile merger remains a headwind
Crown Castle is being negatively impacted by the merger of Sprint and T-Mobile, which was completed in 2020. This has led to some churn and cancellations. Like most REITs, Crown Castle is negatively impacted by rising interest rates, which the company believes will be offset by some accelerated billings related to decommissioning some Sprint towers. Crown Castle believes it will be able to continue to target a dividend growth rate of 7% to 8%.
Brent Nyitray, CFA has no position in the said stock. The Motley Fool has locations at American Tower and Crown Castle and recommends. The Motley Fool recommends T-Mobile US and Verizon Communications. Motley Fool has a revealing policy.