CCI - Crown Castle: Dividend Underpinned By Strong Fundamentals And Secular Growth

2023-06-29 01:19:32 ET

Summary

• Crown Castle, a U.S. equity REIT, is an attractive investment opportunity due to its robust fundamentals, including a strong balance sheet, a target of 7-8% annual dividend growth, and exposure to long-term tailwinds in the data and connectivity segment.
• Despite underperforming the overall equity REIT market by 46% in the past three years, CCI's assets are all based in the U.S., making it immune to foreign exchange risk and regulatory uncertainties. Its predictable income streams and defensive characteristics make it an appealing investment.
• The company's focus on the small cell segment, which is expected to benefit from increased demand as 5G networks replace 3G and 4G, and its ambitious capital expenditure plans for 2023, further strengthen its position.
• Currently, CCI trades at a price-to-FFO ratio of 14.4x, significantly below the sector average.

Crown Castle ( CCI ) is a pure-play U.S. equity REIT, which owns and leases communication infrastructure objects consisting of towers, small cells and fiber solutions. CCI has more than 40 thousand towers, about 120 thousand small cells and ca. 85 thousand route miles of fiber.

In the CCI's case, all of the assets are located in the U.S. territory, which is uncommon among the peers. Most of the CCI's competitors have devised aggressive expansion strategies beyond the U.S. borders to find additional pockets of growth and diversify away the country specific risk. However, given that there are no cash flows stemming from the foreign markets, CCI has the luxury to not worry about FX risk, hedging costs and heterogenous regulatory uncertainties.

As of now, CCI has a market capitalization of ~$48 billion, which is the third largest level in the entire U.S. publicly traded infrastructure and data center REIT space.

The thesis

In my opinion, CCI provides great opportunity for dividend-seeking investors, who also seek defense in combination with some capital appreciation potential.

In the trailing three-year period, CCI has significantly underperformed the overall equity REIT market by ~46% on a total return basis. This has happened despite increased FFO generation and even greater strength of the secular tailwinds.

The key reason why the stock price has dropped is the underlying characteristics of the CCI cash flows, which resemble fixed-income instruments. Put differently, CCI generates extremely predictable streams of income, which are stipulated for many years in the future, offering very limited chances to increase the pricing. All this is rather similar to plain vanilla fixed-income instrument, which have suffered massively due to restrictive monetary policy.

As a result of this, where the price drop has been attributable mostly to unfavourable dynamics in the FED Funds rate, while the fundamentals and defensive characteristics have remained intact, CCI has become rather attractive.

Now, let me substantiate my thesis on CCI's attractiveness (i.e., buy).

First, there is no doubt that CCI is exposed to long-term tailwinds in the data and connectivity segment stemming from 5G and, further down the road, 6G mass enrolments.

As stated above, CCI has all of its assets based in the U.S., which is one of the most attractive markets for data and connectivity providers - i.e., significant demand at a very favourable pricing.

It is expected that the demand for mobile data grows at a CAGR of ~25% until 2027 as the 5G networks replace 3G and 4G objects and greater areas of adequate connectivity are covered.

Moreover, CCI has an unique focus in the small cell segment, which is set to benefit even more from the increased demand. In a nutshell, smaller cells enable wireless carriers to add extra coverage and capacity by relaxing the congestion on their existing towers / networks. This solution fits perfectly with the 'smart city' concept, which currently is really at its infancy stage.

Second , CCI has set a relatively ambitious target to grow its dividend at 7-8% annually. Historically, it has overachieved the target by delivering a CAGR of 9%.

The communicated dividend growth target seems achievable in the context of the structural growth drivers outlined above and the following:

• Most of the CCI's leases embody escalator clauses, which are linked to inflation, thus providing both protection from inflation and boost for future cash flows.
• Projected CapEx spend at ~$1 billion (ca. 85% in the fiber and small cell segment) for 2023 that comes with already contracted cash flows.

Third , CCI carries a fortress balance sheet with the lowest debt ratio (33%) among its peers. The debt maturity profile is also well-structured giving CCI an opportunity to avoid incremental cost of financing from debt rollovers (especially considering the fact that 91% of the debt is based on fixed rates).

As of Q1, 2023, CCI had a weighted average cost of financing of 3.7% and weighted average maturity life of 8 years.

Having a strong balance sheet with so well-laddered maturities allows CCI to:

• Assume significant CapEx plans to further capitalize on the secular opportunities.
• Avoid material headwinds stemming from surging interest costs.
• Negotiate financing at favourable terms (e.g., longer maturities, relatively low credit risk premium).
• De-risk the entire business and increase the overall predictability and stability of the dividend.

Finally , the recent stock performance has created appealing conditions from the valuation perspective. Currently, CCI trades at P/FFO ((FWD)) of 14.4x, which is by ~10% below the sector average and ~46% below the multiple before the FED started to hike interest rates.

The bottom line

CCI offers an attractive dividend yield of 5.5%, which is underpinned by robust fundamentals. The dividend prospects are bright, where CCI's target of delivering a dividend CAGR of 7-8% is well substantiated due to rent escalators, high-yielding capex and positive industry-specific forces, which strengthen the cash generation potential for CCI.

CCI is a clear buy for dividend-seeking investors, who want to also enjoy additional returns from the capital appreciation.

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