Crown Castle International (CCI -0.67%) recently capped off a terrific year by reporting strong fourth-quarter results. The real estate investment trust (REIT) grew its adjusted funds from operations (AFFO) by 14%. That helped support an 11% increase in its dividend, pushing the yield up to 3.4%, more than double the yield on the S&P 500.
One of the big drivers of last year's strong showing is the mobile industry's upgrade to 5G, which requires more communications infrastructure to support the faster network. Crown Castle believes this upgrade cycle will drive continued growth for years to come, which should enable it to create lots of value for investors.
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Towering growth from the phase one rollout
Crown Castle's legacy cell tower business has benefited from the initial build-out of 5G in the U.S. Mobile carriers started by upgrading their existing cell sites to support their 5G networks. That catalyst boosted demand for space on Crown Castle's 40,000 towers, enabling it to add more tenants to each location and enhance its returns.
For example, in late 2020, DISH Network signed a long-term agreement with Crown Castle to lease space on up to 20,000 communication towers. This deal helps support DISH's nationwide 5G network build-out. Meanwhile, T-Mobile recently signed a new 12-year agreement with Crown Castle that includes increased access to its cell tower portfolio in support of the expansion of its leading 5G network.
These deals have the infrastructure REIT expecting that demand for its towers will remain strong in the near term. CEO Jay Brown stated on Crown Castle's fourth-quarter conference call that "as we start 2022, we expect elevated levels of tower leasing to continue this year and anticipate leading the industry once again with the highest U.S. tower revenue growth."
Small cells are about to become a large growth driver
While towers are crucial for the initial build-out of 5G networks, smaller cells and fiber-optic networks will play a leading role in the future. Crown Castle noted in its fourth-quarter report that "our customers are already planning for the next phase of the 5G build-out that will require small cells at scale." That's something Crown Castle can deliver because it already has 55,000 on-air and another 60,000 committed or under construction in its backlog.
The company has signed several notable small cell deals in the past year. About a year ago, Verizon committed to lease 15,000 new small cells from Crown Castle to support its 5G networks. The REIT plans to deploy them over four years. Meanwhile, Crown Castle's T-Mobile deal also increased its access to small cell locations.
These deals have Crown Castle anticipating that small cell deployment will accelerate in the coming years. It expects to deploy 5,000 small cells this year and more than 10,000 per year beginning in 2023. In addition to adding new small cell locations, the company is also seeing a record number of colocation nodes as it adds more than one tenant per site. That's helping boost its investment returns.
Crown Castle also expects 5G to increase demand for its fiber assets, which feature 80,000 route miles of fiber spread across every major U.S. market. CEO Jay Brown stated on the conference call that "we also continue to see opportunities to add to the returns we are generating from small cells by leveraging the same shared fiber assets to pursue profitable fiber solutions growth." That's why the company continues to believe its comprehensive portfolio of towers, small cells, and fiber puts it in an excellent position to benefit as mobile carriers build out their 5G networks.
A 5G-powered dividend
Crown Castle expects its investments to expand its communications infrastructure portfolio and will drive continued AFFO and dividend growth. In particular, the company believes it can grow its 3.4%-yielding dividend at a 7% to 8% annual rate for the next several years, powered by the deployment of 5G in the U.S. That 5G-powered dividend growth makes this REIT an attractive option for income-seeking investors.
