Activist investor Elliott Management is agitating for changes at Crown Castle again—and that could be good news for the stocks of all communications-infrastructure real estate investment trusts, better known as cell-tower REITs.
Elliott is pushing for improvements to Crown Castle's corporate governance and a rethinking of its approach to fiber-optic cable investments, which haven't been generating a sufficiently high return, the hedge fund argues. That could mean paring back capital expenditures or selling that business and associated assets entirely. Shares of Crown Castle jumped 15% this past Monday.
While the Elliott boost is nice, shares of the three cell-tower REITs—Crown, American Tower, and SBA Communications—were already looking attractive before the hedge fund got involved. The stocks have been out of favor this year, with American Tower off 1%, and SBA and Crown Castle down around 10%, even as the S&P 500 index has returned nearly 20% year to date. It had little to do with fundamentals, however. Earnings growth has been solid, and now a macro headwind is turning into a tailwind .
Cell-tower REITs perform a necessary function: They are essentially landlords for antennas, leasing space on hundreds of thousands of communication towers to wireless companies like Verizon Communications, T-Mobile US, and AT&T domestically and local equivalents abroad.
Their growth isn't tied to the fate and fortunes of any one wireless company, instead often renting space on the same tower to multiple carriers. Tower REITs benefit from mobile-phone users' never-ending demand for more and faster data—requiring more antennas in more places and periodic upgrades to network technology. Contracts with carriers tend to extend several years, giving good visibility into future revenue, and include annual rent increases that protect against inflation.
Blame higher interest rates for the underperformance this year of cell-tower REITs, which saw their valuations cut nearly in half by the end of October. Higher interest rates mean greater costs for the borrowing-dependent REIT industry, and dividends are less attractive when bond yields are higher . Crown Castle stock yields 5.4%, versus 3% for American Tower and 1.4% for SBA.
That dynamic has flipped. Markets have priced in an end to the Federal Reserve's rate hikes and potential cuts next year, pushing down bond yields. Tower REIT stocks were rallying even before Elliott's announcement.
"Tower REITs are a good bet on stocks that will benefit from rates going down—with businesses that we like anyway," says Lukasz Tomicki, managing partner at LRT Capital Management, which owns Crown Castle stock.
Unlike many other REITs, which are essentially bond proxies—bought for their dividend income and little else—cell-tower REITs have growth potential as well.
American Tower has the strongest projected results in the next few years—a forecast 5% increase in adjusted funds from operations in 2024, followed by 9% in 2025—while SBA is close behind. Crown Castle is the fixer-upper of the trio, with negative numbers projected over the next two years. But it has the cheapest valuation multiple to make up for that—and now an activist investor lighting a fire under management to turn things around.
The opportunity in cell-tower REITs is ringing. Time for investors to pick up the call.