Funding Thesis: Surprisingly Robust 2021 Makes 2022 Progress Expectation Look Smaller
After cell tower REIT Crown Fort Worldwide (CCI) reported its fourth quarter and full-year 2021 outcomes, the inventory bought off even within the midst of a broad market rally. This made me scratch my head, as CCI appeared to report very robust 2021 efficiency – even stronger than anticipated, actually.
As greatest as I can inform, there seems to be some confusion amongst buyers about CCI’s ahead progress outlook that’s resulting in the selloff.
The midpoint of 2022 AFFO per share of $7.36 represents a “mere” 6% progress year-over-year from 2021’s $6.95. That’s under administration’s long-term aim of 7-8% annual AFFO/share progress. Nonetheless, 2022’s progress expectations haven’t declined. The first motive for the decrease YoY progress expectation from administration is that CCI had a blowout This fall by which income beat estimates by over 9% and AFFO/share beat by 6 cents.
For the complete yr of 2021, AFFO/share elevated a whopping 14% over 2020’s quantity – greater than administration anticipated. As such, 2022’s “mere” 6% AFFO/share progress steerage doesn’t symbolize a discount of their progress expectations for 2022 however fairly the surprisingly excessive progress in 2021 that 2022’s numbers shall be measured in opposition to.
CCI has confirmed itself a wonderful compounder over the past half-decade or so. Certainly, as wi-fi carriers proceed to roll out their 5G networks throughout the nation, CCI seems to be terribly effectively positioned to be a serious beneficiary.
With a really engaging and fast-growing dividend that now yields 3.4%, CCI is a purchase on this author’s opinion.
Overview of Crown Fort
Mockingly, regardless of having “Worldwide” within the title, CCI is fully targeted on its core market of the US, whereas its main peer American Tower (AMT) has far more of a presence in worldwide markets. I do not thoughts this focus within the US, as I imagine CCI is concentrated on essentially the most engaging attainable community of knowledge transportation infrastructure to the 4 main carriers – AT&T (T), Verizon (VZ), T-Cell (TMUS), and DISH Community (DISH).
This is how CCI’s President & CEO Jay Brown defined the corporate’s unique deal with the US market within the Q4 earnings press release:
We imagine the U.S. represents the very best progress and lowest danger market on this planet for communications infrastructure possession, and we imagine our complete providing positions us to profit from what we anticipate shall be a decade-long funding cycle as our prospects develop next-generation wi-fi networks.
At an enterprise worth of almost $80 billion, CCI is without doubt one of the largest REITs by capitalization. Additionally it is the nation’s largest supplier of communications infrastructure.
The fundamental enterprise mannequin is that CCI leases out area on its infrastructure property to tenants, that are normally wi-fi carriers. Surprisingly, CCI doesn’t at all times personal the land below the tower and even the tower itself. Usually, one or each are leased on a long-term foundation, and CCI then leases to its tenants on a shorter-term foundation. CCI’s weighted common remaining contract time period is 5 years.
What’s extra, CCI does little or no by means of working or dealing with the infrastructure itself. This is an illustration from AMT displaying how tenants deal with the operations and upkeep of virtually all parts of cell towers:
This ends in an EBITDA margin of 65-70% and an AFFO margin of 50-55% for CCI. In different phrases, for each greenback of income generated, CCI can anticipate to generate 65-70 cents of EBITDA and 50-55 cents of AFFO.
Furthermore, CCI’s tower contracts embrace income escalators averaging 3% that present embedded progress (and inflation safety) to go together with the upside of infrastructure community enlargement and market resets on the finish of contract phrases.
Regardless of paying a constantly rising dividend since 2014, CCI has allotted lower than 30% of discretionary capital spending to dividends and buybacks over the past ten years. Most of its capital spending has been on progress capex or acquisitions.
Some of the engaging elements of CCI’s infrastructure portfolio is the huge community of small cells. These are smaller, shorter-range nodes sometimes connected to mild poles, phone poles, or buildings that enhance capability in densely populated areas with excessive mobile site visitors and cell information utilization.
This is CCI’s illustration of the worth of small cells:
CCI’s management within the small cell area makes it the premier supplier of infrastructure for carriers seeking to roll out their 5G capabilities.
For the complete yr of 2021, fiber and small cell funding accounted for just a little over 80% of discretionary capital spending, whereas the rest went to the Towers aspect of the enterprise.
One other nice facet of small cells is that the preliminary returns from them are extra engaging for CCI.
Whereas the long-term returns are comparable between towers and small cells, preliminary asset yields are almost double for small cells as for towers. Though you will need to be aware that annual escalators for small cells are roughly half that of towers: 1.5% for small cells versus 3% for towers.
Within the This fall 2021 earnings press launch, Jay Brown made the next touch upon the small cell and fiber section of the enterprise (emphasis mine):
[W]e secured commitments for greater than 50,000 new small cell nodes over the past twelve months, which equates to roughly 70% of the overall small cells we booked in our historical past previous to 2021. Because of this, we now have roughly 55,000 small cell nodes on air and greater than 60,000 dedicated or below building in our backlog. Our prospects are already planning for the following section of the 5G construct out that may require small cells at scale, and this inflection in our small cells enterprise displays how effectively positioned we’re to help their wi-fi community wants for years to come back with our greater than 80,000 route miles of fiber concentrated within the high U.S. markets. I imagine 2022 shall be an vital transition yr for our small cells and fiber enterprise, as we put together to speed up our deployment of small cells from roughly 5,000 this yr to what we anticipate shall be greater than 10,000 per yr beginning in 2023.
I spotlight these sections of the remark to point out that the tailwind from small cell deployment and leasing is simply in its early levels, with extra websites within the improvement backlog than at the moment operational. Furthermore, CCI is planning to roughly double its deployment of small cell nodes subsequent yr from this yr’s stage of deployments.
On that time, CCI’s CFO Dan Schlanger made the remark within the This fall press launch:
Importantly, with a document stage of collocation small cell nodes in our backlog we anticipate to have the ability to fund this increased stage of funding with free money stream and incremental debt capability whereas sustaining our funding grade credit score profile.
Lastly, looking on the steadiness sheet, we discover a conservative debt scenario that features well-laddered maturities, a low weighted common rate of interest of three.1%, a 9.3-year weighted common maturity, and the overwhelming majority of debt fastened price and unsecured.
At $20.3 billion of complete debt (as of the tip of Q3), CCI actually sounds closely indebted. However remember the fact that this represents a mere 4.75x of estimated 2022 EBITDA. In different phrases, CCI’s complete debt to EBITDA is about 4.75x. Internet debt (together with money) to EBITDA is even decrease at 4.65x.
Earlier than This fall 2021’s earnings beat, administration anticipated 2022’s AFFO/share to come back in on the tip of its 7-8% goal annual progress vary. Now it is 6%. However, for 2021, administration anticipated AFFO/share progress of 12%, and it turned out to be 14%. So, successfully, This fall 2021 pulled ahead 2 proportion factors of progress from 2022. Huge deal.
It is vital to acknowledge that CCI’s progress price is not slowing down. It simply seems to be that means due to a really robust displaying in 2021.
However at a Goldman Sachs presentation in September 2021, Jay Brown made these feedback suggesting that progress may shock to the upside in 2022:
So in intervals of time within the firm’s historical past, the place carriers have had spectrum and had capital, these have been the very best intervals of progress for the corporate. And as I take into consideration, not solely are we at a stage the place we have fallow spectrum within the palms of the carriers, and a capital and talent to deploy it, however you have additionally acquired 4 very keen and hungry carriers which are pushing to get community deployed… However I do not see any motive why we do not go into ’22, with tower progress that appears like what we noticed in 2021, or what we’re seeing in 2021.
If 2022 seems to be like 2021 for the Towers section, then 2022’s 6% AFFO/share progress may show too conservative.
This view is pushed by the truth that CCI foresees leasing exercise for its cell towers to be about 50% increased in 2022 than its trailing five-year common.
Since changing right into a REIT in 2014, CCI has delivered 9% compound annual dividend progress, with the most recent two years offering 11% hikes. (Properly, the October 2021 hike was 10.5%, if you wish to break up hairs.)
What number of different REITs on the market can boast such progress whereas nonetheless sporting a 3.4% dividend yield?
And the present annualized dividend of $5.88 represents solely 80% of 2022 midpoint AFFO/share of $7.36.
Once I’m out in public at a restaurant or espresso store, I’m typically affected by the sight of dozens of individuals on their telephones directly – checking e mail, watching TikTok movies, scrolling social media, taking part in app video games, and so forth.
Given the rise in cell gaming and video streaming in addition to numerous different actions we now do on our cell telephones, demand for quick wi-fi community speeds from customers and, in flip, wi-fi infrastructure from carriers appears poised to proceed rising for a few years to come back.
That makes CCI engaging as each a number one wi-fi infrastructure supplier for carriers and a gradual, dependable compounder for shareholders. Progress isn’t slowing down. It is as robust as ever, and it’ll result in extra beneficiant dividend raises for years to come back.