REITs That Tower Above the Competition amid Data Demand: Gadfly

REITs That Tower Above the Competition amid Data Demand: Gadfly

(Bloomberg)—How many Gs can you digest? 2G, 3G, 4G, and soon 5G -- every few years there’s a new mobile network standard promising faster download speeds and more consistent connections. These upgrades require expensive infrastructure investments but are necessary for carriers to keep up with increasing mobile data demand. So like many Americans -- former car buyers and homebuyers alike -- mobile carriers are choosing to rent rather than buy.

As people use more devices more frequently to do more tasks (read: watch cat videos), global mobile data traffic is expected to grow at an average rate of 53 percent annually from 2015 to 2020, according to forecasts from networking equipment company Cisco. That means monthly data traffic per active smartphone in North America in 2021 will be 22 GB a month -- bigger than the entirety of most current family data plans -- according to telecom equipment company Ericsson.

The addition of 5G over the next few years will also increase mobile download speeds 10 to 100 times that of today’s average 4G LTE connections, further taxing existing infrastructure. To hie things along, carriers will need access to more macro cell towers, small cells (less capital-intensive fiber connections used in urban spaces with high-data demand) and distributed antenna systems that spread wireless connections within a small area.

Mobile carriers like Verizon Wireless, AT&T, Sprint and T-Mobile are trying to save money by leasing -- rather than owning -- data transit networks from wireless infrastructure real estate investment trusts (or "tower REITs"), according to research by Bloomberg Intelligence analysts John Butler and Matthew Kanterman.

Carriers can save tens of thousands of dollars a year in construction and maintenance costs per tower by leasing instead of building, according to American Tower (a leading tower REIT).

All of this has made U.S. tower REITs better performers than most other types of REITs:

America’s top tower REITs by market cap, American Tower and Crown Castle International, earn more renting out their cellular infrastructure than carriers (which haven't traditionally rented out the towers they've owned to more than one other company). American Tower says "single-tenant" towers have gross margins of 40 percent from rentals, while towers with, for example, two tenants have 74 percent margins. Those with three tenants have 83 percent margins. In the U.S., both American Tower and Crown Castle have more than two tenants per tower, on average.

This rosy scenario may come under pressure, however. As the existing market for big cell towers in the U.S. becomes saturated, tower REITs are going to have to look for growth elsewhere.

For American Tower, that’s meant building and buying up mobile towers internationally. Last week, it acquired a 51-percent stake in an Indian telecom infrastructure company, Viom. Crown Castle is focusing on the U.S., where margins are higher than abroad, by building fiber connections to small cells that are needed ahead of the 5G rollout.

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

To contact the author of this story: Rani Molla in New York at [email protected] To contact the editor responsible for this story: Timothy L. O'Brien at [email protected]


© 2016 Bloomberg L.P

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