Current price: $191 Target price: $210
Position size: 2% TTM Performance: 12%
Key takeaways:
- Reported a broad beat across key metrics.
- Seeing solid, durable tailwinds on increased spending from the major carriers on 5G spectrum deployment and Dish as a 4th carrier. Dish (as mandated by the FCC due to the TMUS/Sprint merger) is investing in establishing a national 5G network which is a tailwind to CCI.
- Seeing record tower growth now; small cell growth will be longer term driver – they are seeing an inflection point in small cell demand that supports long-term revenue growth. In the near-term carriers remain focused on macro-tower spending w/ small cell/fiber occurring at later stages of their 5G rollout. So this business should be a more meaningful growth driver in the future.
- Revenue stability & Reasonably valued – 90% of sales is site rental revenues based on long-term contracts (5 to 15 years) w/ limited ability to cancel and fixed escalation clauses (some linked to CPI). The rest of their revenue is Services, which is tied to site development and tenant equipment installation. The stock is reasonably valued trading at ~4% 2022 AFFO yield. With LT AFFO/share growth of 7-8% and >3% dividend yield (which they expect to grow w/ FFO), 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).
- Balance sheet strength w/ limited near term exposure to rising rates – They have methodically reduced the risk profile of their balance sheet. Since they achieved their initial investment grade credit rating over 5 yrs. ago, they have increased average debt maturity from 5 yrs. to >9yrs, reduced average borrowing costs to 3% from 3.8% and increased the mix of fixed-rate debt to > 90% from < 70% w/ no meaningful near term debt maturities. So limited near term exposure to rising rates.
Additional highlights:
- Relative to peers (SBAC and AMT), CCI has industry leading organic growth and their domestic footprint has shielded them from the FX headwinds and emerging market challenges currently impacting the other two.
- Seeing record tower growth now; small cell growth will be longer term driver
- Customers upgrading existing tower sites as a part of their first phase of 5G build-out.
- Mid-band (C-band) and high-band (mmWave) spectrum are both are relevant for 5G and will drive lease up activity for CCI.
- Carrier spend is currently focused on deploying mid-band spectrum as this 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, but towers remain the most cost-effective way for carriers to deploy spectrum at scale and establish broad network coverage.
- Carriers just spent a ton (~$90B) at the recent C-band spectrum auctions… and now they’re focused on deploying it.
- This near-term carrier focus is on C-Band deployment is stalling small cell deployment growth. C-band spectrum sits next to the spectrum used by air traffic control and is the tied to the FAA concerns in the news. On the call related to this they said, “There has not been any change in their behavior with our customers and we don’t expect there to be any impact to our 2022 outlook.”
- Small cells are the next stage…
- 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 as it’s a critical tool for carriers to accommodate continued growth in mobile data demand b/c it enables carriers to get the most out of spectrum assets by reusing it over shorter and shorter distances.
- 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.
- Small cell business is indeed picking up – this is key to the long-term thesis: the CEO said they are “seeing an inflection in our small cells business” as customers are ” planning for the next phase of the 5G build out” for what they “expect will be a decade-long investment cycle as our customers develop next-generation wireless networks.” The small cell commitments they’ve secured in the last 12 months equate to 70% of the total small cells they’ve booked in their history prior to 2021.
- Sustainability/ESG considerations…
- Continue to aim for their goal of carbon neutrality by 2025 for Scope 1 and 2 emissions.
- With labor shortages and rising prices, they have continued to make an effort to provide value and opportunity for their carriers: “…we’re happy to provide the capital at a much lower cost than what the markets can provide them capital because of the opportunity that we have to see returns from multiple operators across that same asset.”
- Their solutions also help address societal challenges like the digital divide in under-served communities by advancing access to education and technology. “To date, we have invested nearly $10 billion in towers, small cells and fiber assets located in low income areas.”
- Enhanced 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.
BRK-2021-annual-letter.pdf
