Real estate investment trusts (REITs) are often thought of as mature real estate companies whose growth rate is more or less driven by the pace of the overall economy. Apartment buildings, shopping malls, and office complexes are simply not fast growers. Communications infrastructure, on the other hand, has been growing due to the increased use of mobile data, which looks set to continue for the foreseeable future.
Crown Castle International (CCI 0.88%) is the beneficiary of this long-term trend, and that should translate into higher dividends down the road.
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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 about 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 biggest tenants include T-Mobile, AT&T, and Verizon Wireless. These three tenants accounted for about 75% of Crown Castle's revenue. Crown Castle is one of the three biggest cellphone REITs, sharing the space with American Tower (AMT 0.17%) and SBA Communications (SBAC 0.06%).
The overall cellphone tower industry is being driven by demand for mobile data, which is expected to grow at a 21% cumulative average growth rate between 2022 and 2028. Going forward, the implementation of 5G will be the main driver. The cellphone tower business is characterized by high barriers to entry, and in the U.S., it is dominated by American Tower and Crown Castle.
Crown Castle has a long history of dividend increases
Crown Castle has a long history of dividend increases. Between 2017 and 2023, it increased its annual dividend at a cumulative average growth rate of about 9%. The company just increased its dividend and a 23% drop in the stock price over the past year has helped push the dividend yield to 4.3%. This gives it a better yield than either American Tower or SBA Communications.
Crown Castle management guided for 2022 adjusted funds from operations (AFFO) per share to come in at $7.36 per share and for 2023 AFFO per share to increase 3.7% to $7.63 per share. REITs generally use funds from operations (or some variant) to describe earnings because net income under generally accepted accounting principles tends to understate the cash flow generation capacity of these companies. This is because depreciation and amortization is a big expense for REITs.
However, it is a non-cash charge. This means that net income is usually much smaller than funds from operations. At current levels, Crown Castle International is trading with a price-to-AFFO ratio of 19.1, which is reasonable.
The Sprint/T-Mobile merger remains a headwind
Crown Castle is being negatively affected by the merger of Sprint and T-Mobile, which was completed in 2020. This has led to some increased churn and cancellations. Like most REITs, Crown Castle is negatively affected by rising interest rates, which the company believes will be offset by some accelerated billings related to the decommissioning of some Sprint towers. Crown Castle believes it will be able to continue its dividend growth rate target of 7% to 8%.
