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Cell tower in a field

Why Cell Tower REITs Stand Above the Rest

[Updated: Aug 20, 2020] Dec 29, 2019 by Matthew DiLallo
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Communications tower companies began converting into real estate investment trusts (REITs) in 2011 when American Tower (NYSE: AMT) made the switch. The cell tower company has richly rewarded its investors since that time, generating a 335% total return. That has easily outpaced the S&P 500's 155% total return during that time frame as well as the 119% total return of the Vanguard Real Estate ETF, which is the largest ETF in the REIT sector.

One of the main reasons why cell tower REITs like American Tower have stood above other REIT options is that they've rapidly grown their funds from operations (FFO). That's due in part to the significant rise in mobile data consumption on cellular networks. With that trend expected to accelerate with the deployment of 5G technology, cell tower REITs should be able to continue growing their FFO and dividends at above-average rates over the long-term.

Here's a look at how data has driven the three largest publicly traded infrastructure REITs to new heights -- and why they should continue growing.

American Tower: the name doesn’t even tell half the story

American Tower is one of the largest owners of communications towers in the world, with more than 171,000 sites. Most of those (about 130,000) are outside the U.S., making it a global company. That international exposure has enabled American Tower to grow at an accelerated rate over the years for two reasons. First, it has opened new doors to expansion, and second, most international tower sites only have one tenant. Because of that, American Tower has been able to add more telecommunications companies to these existing towers, enabling it to grow its FFO at an impressive 16% compound rate per share over the last decade.

That international focus will also help American Tower continue growing at a fast pace in the coming years even as the industry transitions to a 5G network, which uses lots of small cells instead of large macro cell towers. That's because many of its markets will be slower to adopt this change. Meanwhile, even in developed markets like the U.S., the current 4G infrastructure will remain important to help support data traffic.

American Tower's CEO Jim Taiclet noted this aspect in the company's second-quarter earnings release, stating that "initial 5G deployments are now picking up in the U.S. and we are seeing increasing signs that low and mid-band spectrum on macro towers will serve as a substantial component of next generation networks."

Because of that, their cell towers will likely remain vital to our increasingly data-driven world, which should enable American Tower to continue growing its FFO and dividend -- which currently yields about 1.8% -- at above-average rates in the coming years.

Crown Castle: leading the small cell charge

Crown Castle (NYSE: CCI) became a REIT in January of 2014. It has also stood out since then, generating a total return of more than 140%. That's better than the total returns of the S&P 500 (75%) and Vanguard Real Estate ETF (82%) during that time frame. Driving that growth has been a steady stream of acquisitions, which have helped it build out a leading portfolio of shared communications infrastructure in the U.S.

Like American Tower, Crown Castle owns about 40,000 macro cell towers in the U.S. In addition to that, it operates 75,000 miles of fiber cable that support 70,000 small cells attached to places like streetlights and utility poles, which are crucial to handling the increased speeds of 5G networks. Because of that, Crown Castle has put itself in a position to continue growing its FFO at a healthy pace, which leads it to believe it can increase its dividend (that currently yields 3.4%) by 7% to 8% annually over the long term.

SBA Communications: A little bit of everything

SBA Communications (NASDAQ: SBAC) is the most recent cell tower REIT convert of the trio, making the switch in 2017. Its shares have been red-hot since then, rallying more than 127%. That has easily outpaced the total returns of the S&P 500 (42%) and Vanguard Real Estate ETF (24%) during that period.

In some ways, SBA Communications is a bit of a hybrid between American Tower and Crown Castle. Like American Tower, it operates internationally, with assets in 14 markets in North and South America -- including the U.S. -- as well as South Africa. Meanwhile, like Crown Castle, it owns macro towers as well as other wireless communications infrastructure, including sites in buildings and on rooftops, distributed antenna systems (DAS), and small cells.

SBA Communications' international focus has helped it grow its FFO at an above-average rate, with it expecting this metric to rise 15% on a per-share basis in 2019. Driving that growth is the continued acquisition of new infrastructure (it recently bought 901 more towers in South Africa) and the steady addition of new tenants to its existing locations.

Meanwhile, SBA Communications is getting itself ready for what's next. CEO Jeff Stoops noted on the company's third-quarter conference call that it continues to "take important and meaningful steps to position SBA well for the upcoming 5G world."

It has been testing several things, including using its in-building and DAS infrastructure for 5G. It also recently purchased a data center in Chicago to "test various business models, so that when mobile edge computing becomes a reality, we will be ready to best maximize SBA's opportunities," according to Stoop. That leads him to believe that "there are truly exciting times ahead" for SBA Communications. The company's ability to capture these opportunities could enable SBA to grow its 0.6%-yielding dividend at a high rate in the future.

Great growth stocks for REIT investors

Cell tower REITs offer something not found in most real estate investments: rapid growth potential. Instead of paying high yields, most of these companies reinvest a large portion of their cash flow to build and buy new infrastructure, which has enabled them to grow at much faster rates than other real estate classes. That trend should continue in the future as they work with the telecommunications industry to support the rollout of 5G networks. Because of that, this sector is an ideal one for REIT investors who value growth over current income.

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Matthew DiLallo owns shares of American Tower. The Motley Fool owns shares of and recommends American Tower and Crown Castle International. The Motley Fool has a disclosure policy.