Become a Cell-Tower Landlord With the Click of a Button

By Brad Thomas, Editor, Wide Moat Daily

I remember my first cell phone purchase was actually a bag phone.

Since I realize how much that dates me, let me give all of my younger readers the rundown. Though, really, the name pretty much says it all.

Bag phones were early portable devices that weighed less than five pounds. Most of them, mine included, had a basic LCD screen that could show up to 10 digits. And they came complete with a handset, transceiver, and battery, all of which fit into… a bag.

I might not have purchased one if not for my boss back then. At the time, I was working for a local real-estate developer who was always one to own the latest and greatest.

He also loved to show off his new toys, not just for bragging rights but because he found them to be so fascinating. The excitement in his eyes as he explained all the parts, pieces, and capabilities was contagious.

So when he bought a bag phone, I decided I had to get one, too. It was just too intriguing. Just too convenient.

Just too cutting edge!

There were also real-estate aspects about this new consumer industry that I couldn't ignore, especially as the technology progressed. The smaller cell phones got, the more they caught on. The more they caught on, the more cell-tower sites were needed.

And those tower sites were built on land that could be developed and leased.

So while my main focus was on building stores and shopping centers for retailers, I was excited to get in on the cell-tower action. I negotiated a handful of cell-tower sites in my hometown of Spartanburg, South Carolina – netting a decent profit each time.

Those development days of mine might be a thing of the past now. But I know there's still plenty of money to make… for a lot less effort.

The Cell-Tower Industry Comes With Automatic Enormous Demand

According to the Wireless Infrastructure Association, there are around 142,100 cell towers in the U.S. That number, incidentally, excludes the 452,000 outdoor small-cell nodes that serve the same function.

It also doesn't account for all the sites in Canada and Mexico… in South America… across Europe and Asia… or in Africa and Australia. All added up, analyst Gabriel Brown believes there are some 7 million physical sites globally.

As intrigued as I was by the technology 30 years ago, I don't think I could have imagined that this business model would mushroom into one of the largest real-estate sectors in the world by market cap.

Source: Wide Moat Research

That's because I didn't fully grasp the full power of the Internet and e-commerce. So much of what we do today sounded like science fiction back then.

The whole cellular system is based on radio transmissions. I explain in REITs for Dummies how:

Wireless devices such as basic phones, smartphones, tablets, TVs, and connected cars and appliances all contain radios. These radios transmit data over the air via wireless spectrum to cell sites that are often placed high atop towers. The message is then transferred to the core network and on toward the appropriate end user's location via the nearest tower.

So the more radio signals, the more numerous or advanced (or both) the equipment needs to be to collect it. That's why REITs for Dummies also points out further room for growth in the sector.

If anything, the expanding reach and quality of mobile broadband continues to drive worldwide demand for mobile interactions, real time data and video, a growing number of smart devices, and a wide range of internet of things ("IoT") applications.

Now, most of us know telecommunication companies in our respective countries that provide our cell-phone coverage. Here in the U.S., it's AT&T, Verizon, and T-Mobile. Elsewhere, it might be:

• Deutsche Telekom
• Vodafone
• Orange
• SingTel
• Jio
• Bharti Airtel
• Converge
• Telecom Egypt
• Etisalat…

They're who we pay monthly fees to be able to talk to whomever we want to, wherever we want to talk. But most consumers don't realize that they don't own the majority of the cell towers they attach their equipment to.

Here in the U.S. – and a growing number of other countries – those sites are actually owned by real estate investment trusts, or REITs.

Reading the Cell-Tower REIT Signals

While telecommunication companies are responsible for making and maintaining cell sites, they tend to outsource the real estate structures – the towers themselves – to cell-tower REITs, of which there are four:

• American Tower (AMT)
• Crown Castle (CCI)
• SBA Communications (SBAC)
• Uniti Group (UNIT)

These property-based businesses control nearly 75% of wireless communication infrastructure in the U.S. And they have significant holdings in international markets as well.

Considering their technological ties in an increasingly technology-obsessed world, it makes sense that cell-tower REITs have done well since their fairly new inception 12 years ago.

Between 2012 and 2022, they averaged 13% annual growth in terms of adjusted funds from operations ("AFFO") per share. REITs aren't usually considered growth stocks due to their slow-but-steady attributes. But cell-towers were an exception for a solid decade.

Now, it needs to be stated that they're not doing so well this year. Year-to-date, they've sold off 6.1% despite the larger market's momentum. This is largely due to the murky economic backdrop they're operating in compounded by uncertainty about interest rates.

Source: Wide Moat Research

It's also true that, because they weren't as depressed as other sectors going into 2024, they didn't have enough ground to make up for. Regardless, their stock prices are depressed, which could make them good buys today.

Just understand that while cell-tower REITs do pay dividends, they're not known for paying high yields. This sector averages just 3.6%.

That's still a nice shareholder bonus but hardly as high as other REITs run. So, as always, there's a give and take.

But considering how the world is only becoming more and more dependent on radio frequencies, I remain bullish on the concept.

It's difficult to see the long-term downside despite this year's rocky ride.

Regards,

Brad Thomas
Editor, Wide Moat Daily

MAILBAG

What are your feelings on cell-tower REITs? Are there other technology-based REITs you want to look into? Write us at feedback@widemoatresearch.com.