Communications Sector

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>>> Cell Tower Companies: The Best Way To Invest In The Mobile Data Boom



Nov 4 2013

includes: AMT, CCI, SBAC



http://seekingalpha.com/article/1801822-cell-tower-companies-the-best-way-to-invest-in-the-mobile-data-boom?source=yahoo



Wireless Tower Infrastructure

Wireless communication towers and the ubiquitous fiber optic cable wires circling the globe via data centers are the most critical pieces of the internet infrastructure that connect people, devices, and networks. In this outlook, we will focus on the tower companies, specifically American Tower (NYSE: AMT), the second largest REIT, and Crown Castle International (NYSE: CCI), which recently announced that it will be converting to REIT status in 2014. It will be the fourth largest REIT by market capitalization upon conversion.

We are overweight the data center/tech sector due to the explosive growth of data usage particularly by the penetration of smart phones. The growth profiles of the tower companies lead all equity REITs due to strong demand fundamentals in both the US and international markets, though international mobile network deployment is still in an early stage compared to the US. In particular, tower companies are an attractive way to play the growth in demand for data due to their investment-grade tenants, stable cash flows, access to capital, and high barriers to entry.

Towering Demand

Towers are principally vertical structures made of galvanized steel upon which the wireless carriers, governmental agencies, broadband data providers, and other mobile technology companies lease space to install the antennas that form the critical backbone for cellular, wireless, radio, television, microwave, and other radio networks. The rapid growth of smart phones and tablets has generated an enormous increase in wireless data consumption placing increasing demands on the carriers to enhance network capacity, quality, and coverage.

The number of wireless subscriber connections in the US now exceeds the total US population. Though the market for connections may seem saturated domestically, a research report by Information Age Economic estimates that investment in mobile broadband will contribute between $260 billion and $355 billion to US GDP in 2017, enough for a 1.6-2.2% increase, while generating 1.2 million net new jobs. Facebook (NASDAQ: FB) is often viewed as a proxy for today's world of internet usage inasmuch as the company processes 350 million photographs, 4.5 billion 'likes', and 10 billion messages per day!

One apparent contradiction that applies in the world of data usage is that 'supply creates demand'. We have heard this term used in other aspects of commercial real estate, and given it little credence. However, faster speeds of data delivery encourage users to download or upload a song, movie, or picture from their mobile device instead of a computer. 4G technology is 20-50 times faster and more efficient than the outgoing 3G networks, and 5G promises to be a multiple of 4G when the next refresh of phones and cellular antennas are ready to be deployed. The ability to have social media applications open and actively engaged while being away from a wired internet connection creates demand that was not previously there, so we actually do believe the somewhat dubious claim. As such, Cisco projects data usage on wireless networks to grow by more than 66% annually from 2012 to 2017, as shown in Figure 1.

(click to enlarge)

The Tenants

The continuous push of technology to meet demand, and the resulting portfolio upgrades by the telecom companies are a large driver of revenues for the tower companies. Similar to other industries with upgrade cycles, the periodic upgrade in technology provides for new demand in the most critical areas as the less critical are receiving the predecessor technology. AT&T (NYSE: T) and Verizon (NYSE: VZ) are the leaders in technology, and the densely populated areas are deemed most critical. Sprint (NYSE: S) and T-Mobile (NYSE: TMUS) complete the 'big 4' of US telecom.

AT&T and VZ are nearly done with their deployment of 4G-LTE, the latest technology, and Sprint and TMUS will be done soon after. However, each of the big four has announced plans to upgrade to LTE-Advanced after completing their LTE networks, which will require another round of capital expenditures.

Currently, AT&T and VZ are in the 'densification' , or 'cell-splitting', portion of their upgrade cycle. The densification of 4G LTE (Long Term Evolution) requires carriers to place sites on new towers to 'infill' weak areas of the network. New leases result in higher revenue for the tower owners when compared to 'amendments', which occur on towers that already support a carrier's equipment. Such amendments can create varying amounts of revenue based on the lease contract, but they are, in general, beneficial to tower owners as the carriers must leave on the previous technology equipment until all devices using that technology are out of circulation. In all, the carriers have guided to $25 billion in capital expenditures for 2013, and we feel confident that the towers will continue to benefit from the carriers' the technology-fueled upgrade cycle.

Tower Alternatives

Areas that restrict building of new towers or have an especially dense population can prove difficult to serve with traditional towers alone. Perfecting connections and network quality in such places requires incremental capacity via rooftop antennas, DAS (both indoor and outdoor), Wi-Fi (facilitates wireless service in retail stores, offices and other venues), and other types of Small Cell networks (enhances speed in urban environments). DAS, or Distributed Antenna Systems, are networks of low range antenna sites that can be deployed in a wide variety of properties such as airports, shopping malls, and sporting arenas. As an example, 300 DAS installations were used at the London 2012 Olympics to support 359,000 mobile users at one time in a part of London that previously had little coverage. We view these solutions as positive for AMT and CCI as they help to fill capacity gaps and promote more mobile usage. Though it comprises a small portion of their portfolios, AMT and CCI are significant players in each of the above-mentioned markets.

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