Current price: $183 Target price: $201 (up from $190)
Position size: 2.3% TTM Performance: 16%
Key takeaways:
- Encouraging guidance – CCI beat estimates and raised full year guidance.
- Solid AFFO/share growth – should be low-double-digits in 2021. Carrier investments in 5G are increasing; higher growth targets aided by recent VZ tower deal.
- 11% dividend increase – ahead of long-term 7-8% dividend growth target
- 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:
- They now anticipate 11% growth in AFFO/share for the full year 2021 (a recent VZ tower agreement aided this), meaningfully above their long-term annual target of 7% to 8%. They expect to grow the dividend in line w/ AFFO growth.
- Quote from the call….
- “We’re obviously very, very encouraged by the activity that we’re seeing among the carriers. We’re not surprised by the urgency that our customers are showing in deploying 5G. The level of commitment that they showed during the C-band auction was really a clear sign that they’re going to invest heavily in 5G. And so, the activity we’re seeing I think just flows from that. We’re seeing that turning to actions as they’re deploying significant amounts of 5G networks and we’re really encouraged by the activity that we’re seeing.”
- CCI can leverage the synergistic value of their shared infrastructure (>40K towers; ~ 80Ksmall cells on air or committed in backlog; 80K route miles of fiber concentrated in the top U.S. markets) to increase capacity utilization w/ continued lease up activity, growing their ROIC, AFFO/share and dividends. With LT AFFO/share growth of 7-8% and ~3% dividend yield, they should compound total returns double-digits over a long period of time as demand for their shared infrastructure offering across towers, small cells and fiber is all tied to robust mobile data growth (~ 30% annually).
- Multi-year tailwinds to drive leasing activity > 5G, spectrum deployment & densification
- Data demand drives the need for additional spectrum and the only way spectrum can meet demand is to deploy it on towers and small cells.
- Densification – In addition to deploying more spectrum, cell site densification has always been a key tool that carriers have used to add network capacity to get the most out of their spectrum assets by reusing the spectrum over shorter and shorter distances. The nature of wireless networks requires that cell site densification will continue as the density of data demand grows, particularly given the higher-spectrum bands that have been auctioned in recent years.
- 5G Spectrum deployment – Leasing activity will increasingly be driven by spectrum deployment for 5G. Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
- Mid-band (C-band) spectrum deployment –C-band 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 lot of money at recent c-band auctions, now they need to spend to deploy the spectrum – they announced a significant new VZ tower agreement related to this.
- High-band (mmWave) spectrum is 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.
- 5G phones as a catalyst – CEO says ” we saw an important milestone and the march towards greater network densification, when Apple announced that all iPhone 12 models sold in the US support millimeter-wave spectrum bands…This announcement reminds me a lot of 2007. At the time the wireless carriers in the US had accumulated a vast supply of 3G capable spectrum, but there were no use cases identified requiring that much capacity. At the time phones were used for talking and in limited cases texting. Ringtones were the exciting feature you could download to personalize your device. Then Apple launched the original iPhone and the world changed.” The introduction of the iPhone kicked-off an era of wireless innovation that spurred unprecedented investments in wireless networks.
- The situation is similar now. The new iPhone was launched for spectrum bands that are not yet deployed at scale. The use cases for 5G are few, but as the iPhone 12 proliferates, the installed base grows the incentive for new applications to be created and for the relevant spectrum to be deployed. Step function increase in latency and bandwidth will spur innovation and efficiencies across industries. CCI makes money off of the infrastructure and Apple makes money off of the applications.
- 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.
- Reasonably valued, trading at ~3.7% 2021 AFFO yield.
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]