In the face of the current economic turmoil, cell towers remain a solid investment, according to a report by Hoya Capital Real Estate, which offers economic, housing and commercial real estate analysis.
“As fears over missed rent payments rattle the real estate sector, cell tower real estate investment trusts (REITs) are not only surviving, they’re thriving, Hoya Capital said. “As a sector, the cell tower REITs represent an example of only one of two REIT sectors in positive territory this year.” Cellular network use has surged amid government stay-at-home orders as businesses and individuals stay connected via virtual interaction.
Within its Cell Tower REIT Index, Hoya Capital tracks the four cell tower and wireless infrastructure REITs that account for nearly $200 billion in market value: American Tower, Crown Castle International, SBA Communications and Uniti Group, along with Landmark Infrastructure Partners, which owns property under cell towers, rooftop wireless sites and billboards.
“Importantly, with the exception of Uniti Group, cell tower REITs operate with some of the most well-capitalized balance sheets across the real estate sector,” according to Hoya Capital’s REIT Rankings series. “Consistent with the persistently winning factors exhibited by the REIT sector over the last decade, higher-yielding, higher-leveraged and ‘inexpensive’ REITs have plunged nearly twice as much as their lower-yielding, lower-leveraged and more ‘expensive’ counterparts. The ‘Big 3’ cell tower REITs all operate with debt ratios below the REIT sector average of 33 percent, while American Tower and Crown Castle both have investment-grade long-term bond ratings.”
Cell tower REITs are among the four sectors with the lowest direct COVID sensitivity, along with self-storage, data center and industrial sectors, according to Hoya Capital. The highest sensitivity to the pandemic can be found in hotels, gaming/casinos, malls and shopping centers.
“Low balance sheet leverage, high operating margins and limited economic sensitivity of rental demand have been in-demand attributes within the REIT sector amid a time of immense economic uncertainty,” Hoya Capital said.
Cell towers rank medium-to-low on Hoya Capital’s general economic sensitivity index, or exposure to a general economic slowdown, just below data centers, which were average. Health care, storage and manufactured homes were the lowest. Cell towers placed medium-to-high among sectors that profit from a drop in the interest rates.
Towers Benefit From Uncertainty in Other Sectors
Tom Engel, a director at Strategic Tower Advisors, said he was not surprised by Hoya Capital’s findings. “People are scared to death of investing in retail, transportation, hospitality and other sectors,” he said. “What is happening is hedge funds and private equity are pouring a ton of equity into the tower market, not only to the large tower companies, but they are funding the equity companies that are funding startups.”
The tower industry is seeing new entrants, including aggregators, buying tower assets, taking advantage of low-cost debt, according to Engel.
STA has brokered deals recently where the offers were higher than he expected, Engel said. “People have money, and they need to spend it,” he said. “They are willing to settle for a little less return. We are seeing a highly active market at this point.”
The picture is not completely rosy in the tower space. There is some downward pressure on wireless internet service provider (WISP) and broadcaster multiples. The federal program to serve rural areas with 5G wireless communications will eventually put the WISPs out of business. Also, broadcasters have seen a drop in advertising, which is making it difficult for them to pay tower rent.
For broadband towers, consolidation of tower assets has placed what’s left behind in high demand. “There will be more pricing pressure to get the remaining broadband towers,” Engel said. “There is a lot of activity, because the money is there. There is more demand than there is product for sale.”
To read the Hoya Capital report on cell tower REITs, CLICK HERE