Cell towers, often considered a neighborhood eyesore in the minds of the public, look like money these days to real-estate investors.
Owners of cell towers lease space to wireless carriers like AT&T Inc. and T-Mobile US Inc. so they can broadcast and pick up signals from cellphones and other devices.
Cell-tower owners have been among the fastest-growing companies in the real estate investment trust sector, as consumers use more data through mobile phones and tablets than ever before.
With carriers and the federal government poised to make more investments as 5G networks begin to roll out this year, the value of these towers is expected to rise. The promise of self-driving cars offers additional upside in the future.
"Cell towers are going to be extraordinarily important" for self-driving vehicles, said Jason Yablon, senior portfolio manager at Cohen & Steers, a large U.S. REIT investor.
The three publicly listed cell-tower companies all rallied last week after a federal judge cleared the merger of mobile carriers T-Mobile and Sprint Corp. Shares of American Tower Corp., Crown Castle International Corp. and SBA Communications Corp. each gained more than 4% on Feb. 11, the day of the judge's ruling.
Despite some earlier concern that moving from four major carriers to three could cut rental revenue paid by cell companies, analysts said that a stronger combined company would be a better tenant for the REITs. The emergence of a fourth carrier, Dish Network Corp., could also help offset any drop in demand.
"Investors originally asked whether this was going to hurt the tower REITs, but it later became how much would the downside be if the deal didn't go through," said Parker Rhea, senior analyst at Jaguar Listed Property, a real-estate investment adviser.
The three cell-tower companies have become among the biggest in the REIT sector—larger than even the biggest office or apartment REITs by market capitalization—after a big rally.
Over the past three years, Crown Castle's share price rose about 80% while the shares of American Tower and SBA have doubled in price. By comparison, the FTSE Nareit All REITs index gained 23% over that period.
What is giving some investors pause is whether these companies have grown too fast over a short period, raising the prospect that their shares could suffer a correction or bouts of volatility.
"'What is the right valuation?' is a debate that we have," said Cohen & Steers' Mr. Yablon, adding that multiples have risen.
Cell tower dividend yields, ranging from 0.5% to 3%, are also modest compared with other types of REITs. The dividend yield of the FTSE Nareit All REITs Index reached 4% at the end of 2019.
But cell-tower yields have been growing. American Tower, the world's biggest REIT by market capitalization at $114 billion, has issued one of the fattest dividend growth rates, rising by at least 20% each year since 2013. It surpassed Simon Property Group as the largest REIT in 2017.
REIT investors don't typically favor sectors with few companies, but the three cell-tower owners collectively own around two-thirds of the bigger towers in the U.S. That means any new competitor faces significant barriers to entry.
"You and I could move into the apartment business, but how do we get 40,000 towers?" said Burl East, chief executive officer at American Assets Capital Advisers, a real-estate investment firm. "There are structural impediments that hinder new companies from coming in."
Many of these towers were built by the carriers themselves decades ago and were then sold to these REITs on a sale-leaseback basis.
Some investors say they like how cell-tower leases typically run for 10 years with options for renewal. The leases have clauses that allow for an average annual lease increase of 3% to 4%, an attractive rate for the landlords, said Dilara Sukhov, an analyst at Moody's Investors Service.
These landlords could also benefit from regulatory moves at the state level. The wildfires in California have prompted regulators to push cellular companies to add backup power at cell towers after residents lost wireless access to emergency services in October.