Current price: $192 Target price: $201
Position size: 2.3% TTM Performance: 14%
Key takeaways:
- Seeing record level of tower activity as existing wireless carriers increase their 5G spend in what should be a massive, decade-long investment and DISH is starting to build a new nationwide 5G network from scratch.
- Stock is down (after hitting an all-time high recently) on lowered full yr. small cell guidance. Long-term small cell growth dynamics intact.
- Solid AFFO/share growth – they now anticipate 12% growth in AFFO/share for the full year 2021, meaningfully above their long-term annual target of 7% to 8%. They expect to grow the dividend in line w/ AFFO growth.
- 5G investment cycle is (finally) ramping…CEO Jay Brown said, “Following a period of building excitement and anticipation, we have seen a significant increase in activity as our customers have started to upgrade their networks to 5G at scale.”
Additional highlights:
- Quote from the call: “We are seeing the highest level of tower activity in our history as our customers are focusing on utilizing towers in the first phase of deploying their 5G networks nationwide. This initial focus on towers has led to delays in some of our small cell deployments that impacts the timing of when we expect to complete the nearly 30,000 small cells currently in our backlog.”
- Carrier spend focused on deploying mid-band spectrum led to reduced full year outlook for small cell deployments (to 5,000 vs. 10,000 prior) but LT dynamics intact – in the near-term, carrier focus is on C-Band (mid-band) deployment which is stalling small cell deployment growth.
- Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
- C-Band is the first stage of 5G deployment and is often referred to as the “goldilocks” band as it is an ideal balance between bandwidth and propagation (i.e. its ability to carry more data and travel far distances). It can be deployed via towers and small cell.
- Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions and now they’re focused on deploying it.
- High-band (mmWave) spectrum is the next stage and is relevant for what’s often called the “real 5G” which would deliver on the huge gains in performance that 5G promises (step function increase in latency and bandwidth). It has significantly more capacity, but over a fraction of the geographic coverage area (lower propagation) which is why it needs to be deployed using small cells connected to fiber, making it ideal for dense urban areas. This densification is a driver of additional leasing. Growth in small cells should drive improving returns as they expect decreasing capital intensity for growth within their small cell and fiber business. With small cells there are “anchor nodes” and “colocation nodes” – the first “anchor” nodes are a lower ROI and additional nodes on existing infrastructure have higher incremental margins. So as lease-up activity continues, their ROI improves.
- Balance sheet strength – They continue to methodically reduced the risk profile of their balance sheet. In Q1, they lowered weighted average borrowing costs and extended the average maturity of their debt. Since they achieved their initial investment grade credit rating ~ 5 yrs ago, they have increased average debt maturity from 5 yrs to 10yrs, reduced average borrowing costs to 3.1% from 3.8%, increased mix of fixed-rate debt to > 90% from < 70% and reduced reliance on secured debt to ~15% from ~50%. No meaningful near term debt maturities and ~$4B of undrawn capacity on their revolving credit facility.
- Sustainability/ESG considerations…
- “Our business is inherently sustainable” – shared infrastructure solutions limit the proliferation of infrastructure and minimize the use of natural resources
- Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology.
- Enhance focus on ESG may drive increased revenue opportunities from things like smart cities and “broadband for all” and lower operating costs in areas like tower lighting and electric vehicles
- Reasonably valued – trading at ~3.7% 2021 AFFO yield. With LT AFFO/share growth of 7-8% and ~3% dividend yield, they should compound total returns low double-digits over a long period of time as demand for their shared infrastructure offering is tied to robust mobile data growth (~30% annually).
Sarah Kanwal
Equity Analyst, Director
Direct: 617.226.0022
Fax: 617.523.8118
Crestwood Advisors
One Liberty Square, Suite 500
Boston, MA 02109
$CCI.US
[category earnings]
[tag CCI]