SPY - American Tower Vs. Crown Castle:  Which Is The Best REIT For 2023?

2023-04-24 08:05:00 ET

Summary

• Cell tower REITs are today heavily discounted.
• American Tower and Crown Castle are both good investment opportunities.
• But which one is the best REIT for 2023?

American Tower ( AMT ) and Crown Castle ( CCI ) are two of the best-performing REITs of all time. They have managed to massively outperform the market all while growing their dividend year after year, even through the great financial crisis, the pandemic, and other crises:

Here is how AMT has performed relative to the S&P500 ( SPY ):

And here is CCI's performance relative to the S&P500 ( SPY ):

What's their secret?

They invest in cell towers and this segment of the real estate market has been exceptionally rewarding over the past decades.

The returns are high and consistent, and they have been able to earn a large spread over their cost of capital, allowing them to grow at a rapid pace.

Today, we think that both REITs remain attractive purchases, but which one is the best?

If I had to pick one, it would be CCI.

I am bullish on both and I am almost indifferent between the two, but I would slightly favor CCI because of three key reasons:

Reason #1 - Materially higher yield

Today, CCI is priced at a near 5% dividend yield.

AMT is priced at a 2.9% dividend yield.

Typically, the difference in yield between these two REITs is smaller because they are fairly similar, but CCI has recently dropped a lot more than AMT and it has caused its yield to expand:

There is of course a reason why CCI dropped so much more (see reason #2).

But regardless of that, I think that the higher yield is an advantage of CCI.

We could be facing a lost decade and I want to earn a good yield to be less dependent on what the market will do next. With a 5% dividend yield, CCI does not need to grow by much to reach double-digit total returns and you get paid to wait.

In fact, CCI is probably the highest-yielding blue-chip REIT in today's market.

Reason #2 - Stronger catalyst

CCI is discounted today and priced at such a high yield because its growth has recently slowed down.

T-Mobile ( TMUS ) bought out Sprint and this will negatively affect CCI as it will lose some leases with Sprint when they expire.

It is a headwind for the next few years and as a result, the growth will be slower than that of AMT in the near term.

But the flip side of this is that CCI is now priced at a materially lower valuation...

...and as it returns to faster growth, the stock will likely rerate a lot higher, providing a clear path to upside.

The CEO recently explained in their conference call that in just 2 years, their growth should accelerate back to where it used to be:

"So to wrap up, we are excited about the strength of our business and our ability to execute on our strategy to deliver the highest risk-adjusted returns for our shareholders by growing our dividend over the long-term and investing in assets that will help drive future growth. We have delivered 9% compound annual and dividend per share growth since we established our 7% to 8% dividend per share growth target in 2017. And I believe that we are positioned well to return to 7% to 8% dividend per share growth as we move beyond the Sprint decommissioning impacts in 2025."

I think that this is a great catalyst.

As they return to larger dividend hikes, it will clearly signal to the market that growth is now accelerating and I expect the market to then reprice CCI at a higher FFO multiple. If it returned to 20x FFO, that would unlock 25% upside from here.

But it is not just that.

Because CCI is already discounted, you also enjoy better margin of safety. If AMT experienced similar headwinds sometime in the future, its shareholders could face similar losses.

Reason #3 - Focus on the US Markets

Finally, one major difference between CCI and AMT is that CCI focuses on US markets whereas AMT invests all over the place:

Both approaches have pros and cons.

Investing in Latin America and Africa can lead to higher returns but it also presents greater risks.

Sticking to the US is safer, but the returns are not quite as high.

In today's environment, I prefer the safety of a US-focused portfolio, especially since it is offered at a lower valuation than the riskier international portfolio of AMT. I fear that emerging markets will face even greater pressures in the coming years.

Bottom Line

I think that both, CCI and AMT, are very attractive investment opportunities.

But if I had to invest in one, it would be CCI because it offers a much higher yield, more upside potential, it has a clear catalyst, and its focus on US markets reduces risks.

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