Will 5G Deployment Create Room For Investment In Tower REITs?

With the big four U.S. carriers deploying 5G network technology, tower real estate has become essential, and cell-tower REITs have started commanding a strong positioning in the REIT sector.

Mobile carriers are investing billions of dollars to rent macro-cell towers, small-cell and fiber networks, in a bid to deliver 5G signals to specific areas. Particularly, going by the S&P Global (NYSE:SPGI) Market Intelligence data, the four U.S. operators recorded aggregate capital expenditures of $55.71 billion in 2018, up from the $53.72 billion recorded in 2017.

Such large investments in the sector have spurred demand for space at tower REIT properties, such as American Tower Corporation (NYSE:AMT) , Crown Castle (NYSE:CCI) and SBA Communications Corporation (NASDAQ:SBAC) . This, again, has helped these companies excel in the broader real estate sector, year to date.

How is the 5G wave benefiting tower REITs?

Notably, cell-tower REITs primarily own macro-communication towers that host the cellular-network broadcast equipment of wireless service providers like AT&T (NYSE:T) , Verizon (NYSE:VZ) , T-Mobile (NYSE:T) and Sprint (NYSE:S) .

Though 5G is poised to deliver lightning-fast speed, it is unable to cover a wider range, suggesting that macro towers will continue to be the primary hub of cellular networks. With this, each tower will likely enjoy local monopoly as wireless telecom providers will need to pay higher rents to tower companies, in order to hang their equipment.

Moreover, 5G requires small cells, which, in turn, need fiber. Small cells offload traffic and boost capacity in network areas where data demand is the greatest, thereby setting the stage for additional network densification. This has prompted companies like Crown Castle to make significant investments in fiber and small-cell networks.

Beyond the 5G Rhetoric

Network densification is required to support 5G networks. This will likely result in above-trend organic growth for cell-tower REITs. Nonetheless, commercial deployment of 5G is an enormous program. Hence, this suggests that the deployment process will likely take significant amount of time to catch up to the existing 4G footprint. Accordingly, 4G is poised to remain predominant, even after 5G is rolled out.

At present, 4G is the primary catalyst driving mobile-data usage. In fact, per a Crown Castle presentation that stated the Cisco (NASDAQ:CSCO) Visual Networking Index (VNI) report, in 2022, the U.S. mobile data traffic is estimated to increase 5x times since 2016. Further, the annual growth rate of mobile-data traffic is projected at 36% through 2017-2022, while the year-on-year increase in U.S. mobile-connection speed will likely be 25%.

Hence, as data volume for wireless and wired network has been growing rapidly, network carriers will likely keep investing more in their networks — by leasing tower and fiber assets, and adding new cell sites and spectrum, in a bid to improve and densify their networks. This, in turn, is anticipated to propel tower-leasing activities.

Furthermore, the business model of tower REITs helps the companies enjoy a recurring revenue stream. Specifically, towers are typically leased under long-term, non-cancellable contracts with embedded annual lease escalators. Fixed cost structures of tower and ability to accommodate future tenants, when a tower reaches capacity, are additional fundamental positives.

Zacks Rank

SBA Communications carries a Zacks Rank of 2 (Buy), at present. You can see the complete list of today’s Zacks #1 Rank (Strong Buy) stocks here.

American Tower and Crown Castle currently carry a Zacks Rank #3 (Hold).

Epilogue

Undoubtedly, 5G will alter the fabric of the society and facilitate large-scale adoption of transformative innovations. As the industry starts its first stage of 5G commercial deployment, the cell-tower REIT industry is well poised to benefit from healthy growth dynamics, accelerating proliferation of data traffic and growing market traction of fiber optics.

Additionally, in the wake of trade-war tensions and President Trump’s call to shun Chinese telecommunication companies like ZTE (HK:0763) and Huawei, the next-generation cellular-network technology has become a national priority, creating abundant room for tower REITs to prosper.

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